3.3 Term Life Insurance Types and Features
Key Takeaways
- Term insurance is pure, temporary protection with the lowest initial premium and no cash value.
- The three classic forms are level (constant face), decreasing (falling face, often level premium, used for mortgages), and increasing term.
- Annual renewable term keeps the face level while the premium rises each year with the insured's attained-age mortality.
- Renewability lets an insured continue coverage without proving insurability; convertibility lets them switch to permanent insurance without underwriting.
- Original-age conversion sets a lower premium but requires a back payment with interest; attained-age conversion costs more ongoing but no lump sum.
Term life insurance provides pure death-benefit protection for a stated period — the term. If the insured dies during the term, the policy pays the face amount; if the insured outlives the term, coverage simply ends with no cash value and nothing returned (unless a special rider applies).
Because term insurance has no savings component, it offers the lowest initial premium per dollar of coverage of any life product. It is often called temporary insurance or pure protection, and the exam contrasts it sharply with permanent (whole/universal) insurance, which builds cash value and is designed to last for life.
The Three Classic Forms of Term
Term is classified by how the death benefit (face amount) behaves over the term:
| Type | Death benefit | Premium | Typical use |
|---|---|---|---|
| Level term | Stays the same | Level for the term | Most common; income replacement |
| Decreasing term | Declines over time | Often level | Mortgage protection (benefit tracks loan balance) |
| Increasing term | Rises over time | Increases | Return-of-premium, COLA riders |
Trap: In decreasing term the premium typically stays level while the face amount falls — students wrongly assume the premium also decreases.
Annual Renewable Term (ART)
Annual renewable term (ART), also called yearly renewable term (YRT), is renewed each year without new evidence of insurability. The face amount stays level, but the premium increases every year because it is recalculated against the insured's higher current-age mortality rate.
- Coverage is guaranteed to continue if the insured keeps paying.
- The rising premium reflects increasing death probability with age.
- ART is the building block underlying the cost-of-insurance charge in universal life policies.
Key Term Features and Options
Two provisions let term policyowners adapt coverage without new underwriting:
- Renewability — the right to renew at the end of the term without proving insurability, though at a higher premium based on attained age. Protects an insured who has become uninsurable.
- Convertibility — the right to convert (exchange) the term policy for a permanent policy without evidence of insurability. The new permanent premium is based either on attained age (current age, lower immediate cost) or original age (issue age, requiring a back-payment of premium differences).
Convertibility Worked Scenario
A 35-year-old buys 20-year level term and at age 45 wants permanent coverage. Under attained-age conversion, the whole life premium is set at age 45 — affordable and immediate. Under original-age conversion, the premium is set at age 35, but the insured must pay the difference in premiums (plus interest) that would have been paid had the permanent policy started at 35.
| Conversion basis | Premium set at | Lump-sum back payment? |
|---|---|---|
| Attained age | Current age (45) | No |
| Original age | Issue age (35) | Yes, with interest |
Return of Premium (ROP) and Other Variants
Return of premium (ROP) term refunds the total premiums paid if the insured survives the term. To fund the refund, ROP charges a substantially higher premium than plain level term; functionally it behaves like increasing term because the survivor payout grows toward the cumulative premium.
Also know:
- Reentry term — lower renewal rates are available if the insured periodically requalifies (re-proves) good health.
- Group/credit term — decreasing term often used to cover a loan balance.
- Term face amounts paid as a death benefit are generally income-tax-free to the beneficiary, just like permanent insurance proceeds.
A borrower buys a term policy whose face amount steadily declines each year to match a shrinking mortgage balance, while the premium stays the same throughout the term. What type of term insurance is this?
An insured converts a term policy to whole life on an ORIGINAL-age basis. Compared with an attained-age conversion, this insured will:
Choosing the Right Term Form by Need
Matching a client's obligation to the correct term shape is a frequent exam task:
| Need | Best term form | Why |
|---|---|---|
| Mortgage protection | Decreasing term | Face declines roughly with the loan balance |
| Income replacement for fixed years | Level term | Constant face for a set period (e.g., 20-year) |
| Short-term, rising-coverage need | Increasing term | Face grows, often used with return-of-premium or COLA |
| Year-to-year flexibility | Annual renewable term | Renews yearly without new evidence; premium rises each year |
Convertibility is the most valuable term feature: it lets the insured exchange term for permanent coverage without evidence of insurability, with the permanent premium set at either the original age (higher level premium, sometimes a back-premium charge) or attained age (current age). Renewability lets the policy continue past the original term, again without proving health, at the higher attained-age rate.
Trap: Term builds no cash value, so it has no nonforfeiture options, no policy loans, and nothing is returned at expiration unless a return-of-premium rider was purchased. Convertibility protects future insurability; renewability protects continued coverage.