3.3 Term Life Insurance Types and Features
Key Takeaways
- Term insurance provides pure death-benefit protection for a stated period with no cash value, making it the lowest-cost coverage per dollar of face amount.
- Level term keeps both premium and face amount constant; decreasing term lowers the face amount while premium stays level; increasing term raises the face amount.
- Annual renewable term (ART) premiums rise each year with attained age but require no new evidence of insurability.
- The renewability provision lets the insured continue coverage without a medical exam; convertibility lets the insured switch to permanent insurance without proving insurability.
- Term is appropriate for temporary needs such as a mortgage, income replacement during child-rearing years, or business loan protection.
Term life insurance is the simplest and least expensive form of life insurance. It provides a death benefit only if the insured dies within a stated term (for example, 1, 10, 20, or 30 years). Because it builds no cash value and the company pays only if death occurs during the period, the entire premium funds pure protection. This is why term gives the most coverage per premium dollar of any life product.
Defining Characteristics
- Temporary coverage for a fixed period.
- Pure protection: no cash value, no living benefits, nothing payable if the insured outlives the term.
- Lowest initial cost per $1,000 of face amount.
- Often renewable and convertible without new evidence of insurability.
| Feature | Term Life | Whole Life |
|---|---|---|
| Coverage period | Temporary | Permanent |
| Cash value | None | Yes |
| Initial premium | Low | High |
| Premium over time | Level or increasing | Level for life |
| Living benefits | None | Loans, surrender value |
Trap: If the insured outlives a term policy, the coverage simply expires and no money is returned (unless a return-of-premium rider was purchased). Candidates often wrongly assume term "pays back" premiums.
Types of Term Insurance
Level Term
Level term keeps the face amount level for the whole term, and the premium is also level for the period. A 20-year, $500,000 level term policy pays $500,000 whether the insured dies in year 1 or year 20, with the same annual premium throughout. This is the most common term form, ideal for income replacement during working years.
Decreasing Term
Decreasing term keeps the premium level but the face amount declines over the term, often to zero at the end. It is commonly sold as mortgage protection because the falling death benefit tracks a shrinking loan balance.
Increasing Term
Increasing term has a face amount that grows over time, often used inside riders (such as a cost-of-living rider or return-of-premium rider) to keep pace with inflation.
Annual Renewable Term (ART)
Annual renewable term is one-year term that the insured may renew each year without proving insurability. The face amount stays level, but the premium increases each year with the insured's attained age because mortality cost rises.
| Type | Face amount | Premium |
|---|---|---|
| Level term | Level | Level for the term |
| Decreasing term | Decreases | Level |
| Increasing term | Increases | Increases |
| Annual renewable term | Level | Increases yearly |
Key Term Policy Features
Renewability
A renewable term policy lets the insured renew at the end of the term without a new medical exam or other evidence of insurability. This protects an insured who has become uninsurable. The trade-off is that the renewal premium is based on attained age, so it is higher than the original premium. Renewability protects against the risk of becoming uninsurable, not against rising cost.
Convertibility
A convertible term policy lets the insured convert to a permanent policy (such as whole life) without evidence of insurability. Two methods set the new permanent premium:
- Attained age: premium based on the insured's age at conversion (lower immediate cost).
- Original (issue) age: premium based on the age when term coverage began; usually requires paying the difference in past premiums plus interest, but locks in a lower lifetime rate.
Scenario: At 35, Maria buys 20-year convertible level term. At 50 she is diagnosed with a serious illness that would make new coverage impossible. Because the policy is convertible, she converts to whole life with no medical questions, securing permanent protection she could not otherwise obtain.
When Term Is Appropriate
- Covering a mortgage or other amortizing debt (decreasing term).
- Income replacement during child-rearing years (level term).
- Protecting a business loan for the loan's duration.
- Maximizing coverage on a limited budget today, often with a convertibility option for later.
An applicant wants coverage that tracks the declining balance of a 30-year home mortgage while keeping the premium constant. Which term form best fits?
A term policyholder who has become uninsurable converts to a whole life policy without a medical exam. Which policy feature made this possible?
Worked Numeric: Convertibility and the Conversion Premium
Term policies build no cash value and are pure protection, so the entire premium funds the death benefit and expenses. Two features carry exam weight:
- Convertibility lets the insured exchange term for permanent insurance without evidence of insurability. On conversion, the new permanent premium is based on the insured's attained age (age at conversion) or, less commonly, original age (cheaper, but the insured pays the back-premium difference plus interest).
- Renewability on annual renewable term (ART) guarantees renewal at a higher, age-based rate without proving insurability; premiums climb steeply at older ages.
Worked idea: a healthy 35-year-old buys 20-year level term. At age 50 a health problem appears. Because the policy is convertible, they convert to whole life at attained age 50 with no medical exam - the conversion right preserves coverage that new underwriting would now deny or rate.