2.2 Term Life Insurance

Term life insurance provides pure death-benefit protection for a specified period, or term. If the insured dies during the term, the policy pays the face amount; if the insured outlives the term, coverage ends with no value returned. Term is temporary insurance with no cash value and the lowest premium per dollar of coverage of any life product. This is why it is the affordability benchmark on the exam.

Why Term Is Cheap

Term has no savings element, so the entire premium funds the cost of insurance and expenses. Because most policies expire before the insured dies, the insurer collects premiums it rarely has to pay back as benefits. The trade-off: protection lasts only while premiums are paid and the term is in force.

The Three Forms of Term

Term policies are classified by how the death benefit behaves over the term, not by premium:

Decreasing term is the classic answer for mortgage protection, where the benefit shrinks alongside the loan balance. Increasing term often appears as a cost-of-living rider that raises the benefit to offset inflation.

Renewable and Convertible Provisions

Two provisions make term flexible and are heavily tested:

• Renewable — the policyowner may renew the policy at the end of the term without evidence of insurability (no new medical exam). The renewal premium rises because it is based on the insured's attained age. Renewability protects an insured who has become uninsurable.
• Convertible — the policyowner may convert the term policy to a permanent (whole life) policy without proving insurability. Conversion can use the attained-age method (premium based on current age, lower initial cost) or the original-age method (premium based on age at original issue, requires paying the difference in past premiums plus interest, but lower ongoing cost).

Special Term Structures

• Annually renewable term (ART) renews every year at the new attained-age rate; the purest form of one-year term.
• Level term to a specified age (e.g., 10, 20, or 30-year level term) locks both face and premium for the period.
• Return of premium (ROP) term refunds premiums paid if the insured survives the term; this is technically increasing term and carries a much higher premium.

Common Exam Traps

1. Renewable does not mean the premium stays level — it rises with attained age. Only the right to renew is guaranteed.
2. Convertibility preserves insurability, not price — converting still triggers a higher permanent premium.
3. Decreasing term has a level premium even though the benefit drops. Students wrongly assume the premium decreases too.
4. Term has no cash value, no loan value, and no nonforfeiture options — those belong only to permanent insurance.

Re-entry Term and Conversion Timing

Re-entry term offers a lower premium scale to insureds who periodically re-qualify by proving good health (evidence of insurability). If the insured cannot re-qualify, the premium jumps to a higher guaranteed scale. The exam contrasts this with ordinary renewable term, where renewal never requires a medical exam but always uses attained-age rates.

Convertibility usually has a deadline — the conversion privilege expires after a set number of years or at a stated age (for example, conversion allowed only through age 65). Producers must alert clients before the window closes, because once it lapses the insured may be unable to obtain permanent coverage if their health has declined. The two conversion methods are summarized below:

When Term Is the Right Recommendation

Term fits clients with temporary, high-coverage needs and limited budgets: a young family protecting against income loss until children are grown, a homeowner covering a mortgage, or a business protecting a term loan. Because the cost per thousand is low, a client can buy a large face amount affordably — addressing the most common gap that a Needs Analysis reveals.

Term Pricing and the Net Amount at Risk

Unlike whole life, term builds no reserve, so the insurer's net amount at risk equals the entire face amount throughout the term. As the insured ages, the mortality cost of providing that face amount rises sharply. This is why a 10-year level term premium is calculated by blending (averaging) the rising annual mortality costs over the level period: the policyowner pays slightly more than the true cost in early years and slightly less in later years, but no cash value accumulates from the difference — it simply funds the level-premium guarantee.

This mechanic explains the renewal-premium jump. When a renewable term ends and the insured renews, the insurer must re-price the next term at the insured's much older attained age, where annual mortality cost is far higher. The premium can rise dramatically — sometimes enough that older insureds let the policy lapse precisely when they may need coverage most. Recognizing this affordability cliff is a frequent suitability question, and it is the strongest argument for converting to permanent coverage before renewal premiums become prohibitive.