2.2 Term Life Insurance

Term Insurance: Pure, Temporary Protection

Term life insurance is pure protection for a limited period. It pays a death benefit only if the insured dies during the stated term — one year, ten years, twenty years, or to a specified age. It builds no cash value, has no living benefits, and expires worthless if the insured outlives the term.

Because the entire premium funds the cost of insurance (no savings element), term offers the lowest initial premium per dollar of death benefit of any product. That makes it the tool of choice when the need is large but temporary — covering a mortgage, replacing income while children are young, or protecting a business loan. The trade-off is that term premiums rise steeply at older ages and most policies eventually become unaffordable, which is why exam questions stress its temporary nature.

The Three Benefit Patterns

Term policies differ in how the face amount behaves over the term:

• Level term — the death benefit and (usually) the premium stay constant for the whole term. This is the most common form and the default unless a question says otherwise.
• Decreasing term — the death benefit declines on a schedule while the premium stays level. It is designed to track an amortizing debt, so it is the classic mortgage protection and credit life product.
• Increasing term — the death benefit grows over time, often tied to a cost-of-living index or used as a return-of-premium rider that returns paid premiums as additional benefit.

A reliable exam tell: "covers a mortgage that shrinks each year" = decreasing term; "level coverage for a 20-year need" = level term.

Renewability — Continuing Coverage Without a Medical

A renewable term policy lets the owner continue coverage for another term without providing evidence of insurability (no new medical exam), even if the insured's health has declined. The insurer cannot refuse renewal based on health.

The catch is price: each renewal premium is recalculated at the insured's attained age — the age reached at renewal — so the cost climbs with each renewal. Because only impaired insureds tend to renew at the highest ages, premiums rise sharply. Annual renewable term (ART) renews every year; level term to a set age renews as a block. The key phrase to memorize is that renewability guarantees continuation without proving insurability, not a guaranteed flat price.

Convertibility — Exchanging Term for Permanent

A convertible term policy lets the owner exchange it for a permanent policy (whole or universal life) without evidence of insurability, again regardless of health changes. Conversion is the second great safety valve of term insurance.

The new permanent premium is set one of two ways:

• Attained-age conversion bases the new premium on the insured's age at conversion (lower immediate cost, but higher than original-age).
• Original-age conversion bases it on the age when the term policy was first issued (a higher upfront catch-up payment of back premiums, but a lower permanent rate going forward).

Renewability and convertibility are separate, independent provisions — a policy can offer one, both, or neither. The shared exam trigger for both is the phrase "without proving insurability."

Worked Attained-Age Example

A 35-year-old buys a 10-year level term policy. At age 45 the policy is renewable. The original premium reflected age 35 mortality. On renewal, the insurer recalculates using attained age 45 mortality, so the new premium is materially higher even though the face amount is unchanged and no medical exam was required.

If instead the insured converts to whole life at 45 using original-age conversion, the permanent premium is calculated as though purchased at age 35 — but the insured must pay the difference in cash values or back premiums that would have accumulated. Choosing attained-age conversion avoids that lump sum but locks in a higher ongoing permanent premium. Distinguishing these two pricing bases is a frequent exam item.

Special Term Forms and Riders

Beyond the three benefit patterns, several term variations appear on the exam:

• Annual renewable term (ART) — renews every year at attained-age rates; the purest pay-as-you-go structure.
• Return-of-premium (ROP) term — refunds total premiums paid if the insured survives the term; costs more because of the savings element built into the increasing benefit design.
• Term riders on permanent policies — add temporary coverage (such as a child or spouse term rider) onto a whole or universal life base.

Term is also the comparison baseline in the classic "buy term and invest the difference" debate: term plus a separate investment versus permanent insurance. Examiners may test the conceptual trade-off — lower cost and no forced savings versus guaranteed lifetime coverage and tax-advantaged cash value.

When Term Is the Right Recommendation

Term suits a temporary, high-need situation where budget is limited. The textbook cases are income replacement during child-rearing years, covering a 30-year mortgage, protecting a business loan for its repayment period, or guaranteeing a buy-sell obligation until a sinking fund matures.

Because term expires and premiums climb at older ages, it is a poor fit for permanent needs such as estate liquidity, final expenses, or lifelong dependent support — those call for whole or universal life. A suitability question that pairs a temporary need with a tight budget points to term; one that pairs a lifelong need with cash-value goals points away from it. Matching duration of need to duration of coverage is the core judgment the exam rewards.

Worked Renewable-vs-Convertible Decision

A 40-year-old holds a 10-year level term policy expiring at age 50. Health has declined. Two safety valves apply, and neither requires a medical exam.

If the insured only needs a few more years of coverage, renewing for another term is cheapest in the short run, though the attained-age (50) premium is higher than the original. If the need is now permanent — say, lifelong support for a disabled dependent — converting to whole life locks in lifetime coverage and builds cash value, despite a much higher permanent premium. The deciding factor is the duration of the remaining need, not the insured's preference, because both options are guaranteed regardless of health. Recognizing that both rights coexist independently is the exam's key takeaway.