2.2 Term Life Insurance

Term life insurance is the simplest, least expensive form of life insurance. It provides pure death protection for a specified period (the term). If the insured dies during the term, the face amount is paid; if the insured outlives the term, coverage simply ends and nothing is paid. Term builds no cash value and offers no living benefits.

Because the insurer collects premium only for a limited, defined risk window and sets nothing aside for savings, term delivers the most coverage per premium dollar. It is the right tool for temporary needs.

Core Characteristics

• Temporary coverage (10, 15, 20, 30 years, or to a stated age such as 65).
• No cash value, no policy loans, no surrender value.
• Lowest initial premium of any life product.
• Death benefit paid only if death occurs during the term.

Types of Term Insurance

Level Term

The face amount and the premium both stay constant for the entire term. This is the most common form, used for income replacement and to cover a fixed obligation.

Annual Renewable Term (ART) / Yearly Renewable Term (YRT)

Coverage is issued one year at a time. The face amount stays level, but the premium increases each year based on the insured's attained age because mortality risk rises with age. Renewal is guaranteed without new underwriting.

Decreasing Term

The face amount declines over the term while the premium stays level. The classic use is mortgage protection, where the shrinking death benefit roughly tracks the falling loan balance.

Increasing Term

The face amount rises over time, often to offset inflation or as a return-of-premium feature; the premium may be level or increasing.

Renewability and Convertibility

Two provisions make term insurance flexible and are heavily tested.

Renewable Provision

A renewable term policy lets the owner continue coverage for an additional term without evidence of insurability (no new medical exam). The catch is price: the renewal premium increases because it is based on the insured's new, older attained age. Renewability protects an insured who has become uninsurable but still wants coverage.

Convertible Provision

A convertible term policy lets the owner exchange it for a permanent (whole life or universal life) policy without proving insurability. Conversion is allowed up to a stated date or age. Two methods exist for setting the new permanent premium:

• Attained-age conversion – the permanent premium is based on the insured's age at conversion (lower initial outlay, no back premium owed).
• Original-age conversion – the permanent premium is based on the age when the term policy was first issued, but the insured must pay the difference in premiums (often with interest) for the years already elapsed.

Exam Tip: Renewable = keep TERM longer without a new exam. Convertible = switch term to PERMANENT without a new exam. Do not confuse the two.

Worked Comparison

A 35-year-old buys a 20-year, $500,000 level term policy at $30/month and a friend buys ART starting at $12/month.

ART is cheaper early but becomes more expensive than level term as the insured ages – the reason most buyers with a fixed multi-year need choose level term.

When Term Is and Is Not Appropriate

Term fits temporary needs: covering a mortgage, replacing income until children are independent, or backing a business loan. Term is a poor fit when the need is permanent (final expenses, estate liquidity, lifelong dependents) or when the client wants forced savings or cash value.

Trap: "The insured outlived the 20-year term and wants the cash value." Term has NO cash value – the correct answer is that coverage simply ended with no payout.

Special Forms of Term You Should Recognize

• Credit life insurance is decreasing term written on a borrower to pay off a debt if the borrower dies. The creditor is the beneficiary, the benefit may never exceed the loan balance, and it is regulated to prevent overcharging.
• Group term life is one master contract covering many employees. It is typically annually renewable term, requires little or no individual underwriting, and often gives a departing employee a conversion privilege to an individual permanent policy without evidence of insurability within 31 days.
• Return of premium (ROP) term refunds all premiums if the insured survives the term; the trade-off is a premium two to three times higher than ordinary level term, and the refund earns no interest.

Exam Tip: Re-entry term offers a lower "select" rate if the insured periodically re-qualifies medically; if the insured cannot re-qualify, the premium jumps to the higher "ultimate" rate. This rewards continued good health but penalizes those who become uninsurable.