2.2 Term Life Insurance

Term life insurance provides pure death-benefit protection for a specified period and builds no cash value. If the insured dies during the term, the face amount is paid; if the insured outlives the term, coverage simply expires. Because nearly all premium dollars buy mortality protection, term offers the most coverage per premium dollar of any life product — the central reason it dominates income-replacement sales.

Key characteristics

• Temporary protection (a stated number of years or to a stated age).
• No living benefits — no loan value, no surrender value.
• Premiums rise as the insured ages because mortality risk rises.
• Often used to cover a temporary need: a mortgage, a child's dependency years, or a business loan.

Because term has no savings element, it is sometimes called "pure insurance." The premium reflects only the cost of insurance (mortality), a share of the insurer's expenses, and a small margin. There is nothing to surrender, borrow against, or invest. This makes term the product of choice when a client needs a large face amount but has limited premium dollars — the classic recommendation for a young family with a mortgage and dependent children.

The three forms of term

Term is categorized by how the face amount behaves over the term:

• Level term — the death benefit stays constant. This is the most common form; premiums may be level for the period (e.g., 10-, 20-, 30-year level term).
• Decreasing term — the death benefit declines on a schedule while the premium stays level. It is matched to a falling obligation such as an amortizing mortgage; mortgage-protection insurance is the classic example.
• Increasing term — the death benefit grows over time, often used inside return-of-premium riders or to fund a rising obligation.

Renewability and convertibility

Two provisions make term flexible and are heavily tested:

• Renewable — the owner may renew for another term without evidence of insurability (no new medical exam). The renewal premium increases to reflect the insured's attained age. This protects an insured who has become uninsurable.
• Convertible — the owner may convert to a permanent policy without proving insurability. Conversion may be priced at attained age (premium based on current age) or original age (premium based on age at original issue, usually requiring a lump-sum back-premium payment).

Trap: Renewability and convertibility both waive evidence of insurability; the difference is that renewal stays term while conversion moves to permanent coverage. Annually Renewable Term (ART) has the lowest first-year premium but the steepest annual increases.

Conversion timing matters on the exam. A typical policy allows conversion only during a stated conversion period (for example, the first 10 years of a 20-year term, or up to a stated age such as 65 or 70). Converting at original age produces a lower ongoing permanent premium but requires paying the difference in past premiums plus interest as a lump sum; converting at attained age avoids the back-payment but locks in a higher premium based on current age. Advise clients who expect to keep coverage permanently to convert early, before rates climb.

Re-entry and worked comparison

A re-entry term provision lets the insured re-qualify at lower select rates by submitting new evidence of insurability at renewal; failing to re-qualify pushes the insured into higher ultimate rates.

Example: A 35-year-old buys a 20-year $500,000 level term policy for $35/month. A whole life policy with the same face costs roughly $450/month. The term buyer pays about $8,400 over 20 years for the same face the whole life buyer funds at $108,000 — illustrating term's leverage when the need is temporary, while accepting that term will likely expire unused.

A final tested distinction is interim term (or interim coverage) versus return-of-premium (ROP) term. Interim term provides short, gap-filling protection until a permanent policy issues. ROP term refunds all premiums if the insured survives the level period — a feature that makes ROP premiums substantially higher than plain level term, because the insurer must reserve for the eventual refund. Remember the hierarchy of cost for a given face: ART starts cheapest, level term is moderate, and ROP term is the most expensive form of term insurance.

Decreasing Term and Mortgage Protection

Decreasing term carries a level premium but a declining face amount, matched to an amortizing debt. The classic application is mortgage redemption (mortgage protection) insurance, where the death benefit shrinks roughly in step with the loan balance. A frequent distractor claims the premium decreases — it does not; the face decreases while the premium stays level. Credit life insurance is a specialized decreasing-term product assigned to a creditor as beneficiary, capped at the outstanding loan balance.

Return of Premium and the Cost of Term

Return-of-premium (ROP) term refunds the total premiums paid if the insured survives the level term period. It is technically still term insurance but carries a much higher premium because the insurer must reserve for the refund — the exam treats the extra cost as the price of the "savings" feature.

Worked convertibility example: A 35-year-old holds a 20-year level convertible term policy. At age 45, while healthy, she converts to whole life. Because conversion is without evidence of insurability, the new permanent premium is based on her attained age (45) under the attained-age method, or optionally her original issue age (35) with a lump-sum back-premium charge under the original-age method. Either way, no new medical exam is required — the convertibility right preserves insurability she might otherwise lose.