2.2 Term Life Insurance
Key Takeaways
- Term life provides pure death-benefit protection for a stated period with no cash value.
- Level term keeps both premium and face amount constant; decreasing term lowers the face amount over time.
- Renewable provisions let the insured continue coverage without new evidence of insurability—at a higher attained-age premium.
- Convertible provisions allow exchange to permanent coverage without proving insurability.
- Term offers the most death benefit per premium dollar, making it ideal for temporary, high-need periods.
Term life insurance is pure protection: it pays a death benefit only if the insured dies during the policy's stated term, and it builds no cash value. Because the insurer is only on the risk for a limited window, term delivers the most death benefit per premium dollar of any life product. It is the right tool for temporary needs—covering a mortgage, replacing income while children are dependent, or protecting a business loan.
Core Characteristics
- Temporary: coverage lasts a set period (e.g., 1, 5, 10, 20, or 30 years) or to a stated age (e.g., to age 65).
- No cash value: nothing accumulates; if the insured outlives the term, coverage simply ends.
- Lowest initial premium: among all life products at the same face amount and age.
- "Use it or lose it": pays only on death within the term.
The low cost comes from a simple fact: most insureds outlive a 10- or 20-year term, so the insurer pays relatively few claims relative to premiums collected at younger ages. As the insured ages, the pure cost of insurance rises sharply, which is why term becomes expensive to renew at older ages and why permanent products eventually cost less to keep in force late in life.
Types of Term Insurance
| Type | Premium | Face amount |
|---|---|---|
| Level term | Level for the term | Level (constant) |
| Decreasing term | Level | Decreases over time |
| Increasing term | Increases | Increases (often tied to a rider/COLA) |
| Annual renewable term (ART) | Increases each year | Level |
Level term is the most common—both premium and face stay flat for, say, 20 years. Decreasing term pairs a shrinking benefit with a level premium; it is classically used as mortgage protection, where the face amount tracks the declining loan balance, and as credit life that pays off an installment loan. Increasing term raises the face amount over time and is often attached as a cost-of-living (COLA) rider. Annually renewable term (ART) has the lowest first-year premium but rises every year with the insured's attained age, making it cheap early and costly to hold long-term.
A related distinction is whether the policy is written as a stand-alone term contract or as a term rider attached to a permanent policy. A common rider is family term (covering a spouse and children under one permanent base policy) and other-insured term riders. Riders let one contract cover multiple lives or add temporary protection on top of a permanent base without issuing separate policies, and the exam may describe a rider rather than naming it.
Key Term Provisions
The two provisions that protect an insured's future insurability are the most heavily tested points in the entire term-life topic.
Renewability
A renewable provision lets the policyowner renew at the end of the term without evidence of insurability—the insurer cannot demand a new medical exam. The new premium is based on the insured's attained age (current age), so it is higher at each renewal. This protects an insured who has become uninsurable (for example, after a serious diagnosis) from losing all coverage. Renewability typically extends only to a stated age, such as 65 or 70.
Convertibility
A convertible provision lets the owner exchange (convert) the term policy for a permanent policy without proving insurability. Conversion methods:
- Attained-age conversion: premium set at the insured's current age (lower immediate jump, but higher than original-age).
- Original-age conversion: premium set at the age when the term policy was originally issued; the insurer usually requires payment of the back-premium difference plus interest, because cash value must be brought up to where it would have been.
Conversion privileges usually expire at a set age or after a set number of years, so timing matters.
Re-entry
Some term contracts allow re-entry: the insured can requalify by submitting new evidence of insurability to obtain a lower select premium rate, or simply accept a higher non-select rate to continue without underwriting.
When Term Fits
Term is ideal when the need is large but temporary: income replacement during child-rearing years, covering a 30-year mortgage, or guaranteeing a business loan. It is a poor fit for permanent needs such as estate liquidity or final-expense coverage that must exist whenever death occurs, because the coverage may expire before the insured does.
Group and Other Term Forms
Most employer-provided life insurance is group term: one master contract covers many employees, underwriting is simplified or guaranteed, and employees may convert to an individual permanent policy without evidence of insurability when they leave. Credit life is decreasing term that pays a lender the outstanding balance of a loan if the borrower dies; the lender is the beneficiary up to the loan amount. Return-of-premium (ROP) term refunds the premiums paid if the insured survives the term, but charges a substantially higher premium for that feature.
Exam trap: Renewability extends the same term coverage without a new exam; convertibility changes the policy type to permanent without a new exam. Both waive evidence of insurability—do not confuse which one extends term versus which one converts to permanent.
Which type of term insurance is most commonly used to cover a declining mortgage balance?
A renewable term provision is valuable primarily because it allows the policyowner to: