2.2 Term Life Insurance

What Term Insurance Is

Term life insurance is the purest form of death protection. It pays the face amount only if the insured dies during a specified term — 1, 5, 10, 20, or 30 years, or to a stated age (e.g., to 65). It is temporary and builds no cash value. Because the premium pays only for the mortality cost of that period, term delivers the most death benefit per premium dollar at younger ages.

Think of term as "renting" coverage. If the insured outlives the term, the policy simply expires with nothing returned (except in a return-of-premium variant). On the exam, the two defining negatives to remember are: no cash value and no living benefit at maturity.

The internal cost of term is the mortality charge — the pure cost of insuring a given age for one year. That charge rises every year as the probability of death increases. Level-premium term simply averages those rising charges across the level period so the policyowner pays a smooth amount; in the early years the policyowner slightly overpays the true mortality cost, and in later years slightly underpays. Understanding this averaging explains why ART starts cheaper but ends far more expensive, and why a level-term insurer charges more in year one than an ART insurer does.

Types of Term

Decreasing term is the classic mortgage-protection product: the death benefit drops roughly in step with the declining loan balance, while the premium stays level. Increasing term is most often seen as a rider (e.g., a cost-of-living rider) rather than a standalone policy.

Key Provisions: Renewable and Convertible

Two provisions dominate term exam questions:

Renewable — The insured may renew the policy at the end of the term without new evidence of insurability (no medical exam). The new premium is based on the insured's attained age, so it rises at each renewal. Renewability protects an insured who has become uninsurable from losing coverage.

Convertible — The insured may exchange (convert) the term policy for a permanent policy without proving insurability. Conversion is allowed up to a stated age or date. Two ways to set the permanent premium:

• Attained age — premium based on the insured's age at conversion (lower immediate cost, but higher than original-age).
• Original age — premium based on age when the term policy was first issued; the insured pays a lump-sum "back premium" plus interest to make up the difference.

Both provisions exist so a person who develops a health problem can keep or upgrade coverage. Memorize the phrase: renewable and convertible options never require evidence of insurability.

A subtle but heavily tested point is why these provisions matter to a sick insured. An insured who became uninsurable (developed cancer, diabetes, etc.) could never qualify for a brand-new policy. Renewability guarantees the same coverage continues; convertibility guarantees access to permanent insurance. Insurers price this protection into the premium. The standard policy combines both — a renewable and convertible (R&C) term policy — which is the most consumer-friendly and the most common form sold for income replacement.

How Premiums Behave

A worked comparison clarifies the trade-off. Suppose a 35-year-old buys $500,000 of coverage:

• 20-year level term: premium fixed for 20 years (say $30/month). Predictable, lowest cost for a fixed need.
• Annual renewable term (ART): starts cheapest in year one (perhaps $18/month) but climbs every year as mortality cost rises; by the late years it far exceeds level term.

Exam math note: ART always has the lowest first-year premium of any term form but the highest cumulative cost if held many years. Level term costs more initially but averages the rising mortality charge across the level period.

Re-entry term is a variation worth knowing: at the end of each level period, the insured may "re-enter" at lower select rates if they can prove they are still in good health; if they cannot, premiums jump to higher attained-age rates. This rewards healthy insureds but penalizes those who became uninsurable — the opposite trade-off from a guaranteed renewable provision, which never requires evidence of insurability. Exam scenarios contrast these two to test whether you understand that re-entry shifts mortality risk back onto the insured.

Traps

• Term has no nonforfeiture (cash) values — do not select a cash-surrender answer for a term question.
• Renewal premiums use attained age, so "the premium stays the same forever" is wrong for ART and for renewals.
• Conversion does not require a medical exam; that is the entire point of the provision.

Worked Comparison: Cost of Term Over Time

Numbers make the term trade-offs concrete. Picture a 35-year-old man buying $250,000 of coverage. Annual renewable term might start near $180 in year one but climb to several thousand dollars by his sixties as attained-age mortality charges rise. A 20-year level term on the same life might run roughly $300 per year, fixed for the full 20 years, costing more early but far less in the later years of the level period. Total outlay over 20 years favors level term for anyone keeping coverage the whole time; ART wins only for someone who genuinely needs just a year or two.

Decreasing term rounds out the family. Its face amount declines on a schedule while the premium stays level, which is why it pairs naturally with an amortizing mortgage: a $200,000 balance falling over 30 years is matched by a death benefit that falls on a parallel curve, so the survivor can retire the loan no matter when death occurs. The exam frames these as needs-matching items: temporary income replacement for working years points to level term, debt that amortizes points to decreasing term, and a guaranteed insurability need points to a convertible feature.

Choosing the form whose benefit pattern mirrors the disappearing need is the reliable way to answer term scenario questions.