2.2 Term Life Insurance

Term life insurance provides pure death-benefit protection for a specified period—the term—and pays only if the insured dies while the policy is in force. It builds no cash value and is sometimes called "pure protection." Because it strips out the savings element, term offers the lowest initial premium of any life product, which is why it dominates exam questions about cost-efficient coverage.

Core Characteristics

• Temporary protection — coverage lasts 1, 5, 10, 15, 20, or 30 years, or to a stated age (e.g., to age 65).
• No cash value — no living benefits, loans, or surrender value.
• Renewable and convertible options are common riders that add flexibility.
• Premium per dollar of coverage rises with age because mortality risk increases.

The Three Types of Term

The death benefit (face amount) behaves differently across the three classic forms tested on the exam:

Decreasing term is the classic answer for mortgage protection: the face amount falls roughly in step with the declining loan balance, while the premium stays level. Increasing term often funds a return-of-premium feature or cost-of-living rider.

Credit Life Insurance

Credit life is a specialized form of decreasing term tied to a specific loan. The lender is the beneficiary, the coverage cannot exceed the loan balance, and the benefit shrinks as the borrower repays. It is regulated to prevent over-charging and is typically sold as a group policy at the point of lending.

Level Term Worked Example

A 35-year-old buys a $500,000 20-year level term policy. The death benefit stays $500,000 for all 20 years and the premium is fixed for the full period. If the insured dies in year 18, beneficiaries receive the full $500,000. If the insured outlives the term, the policy expires with no value—unless an ROP rider applies.

Key Term Provisions: Renewable and Convertible

Renewable Term

The renewability provision lets the policyowner renew coverage at the end of the term without evidence of insurability (no new medical exam). The catch: the premium increases at each renewal based on the insured's attained age. Renewable term protects an insured who has become uninsurable from losing coverage.

Convertible Term

The convertibility provision lets the policyowner convert term coverage to a permanent (whole life) policy without proving insurability. Two ways the converted premium is set:

• Attained-age conversion — premium based on the insured's age at conversion; lower immediate cost.
• Original-age (retroactive) conversion — premium based on age when the term policy was issued; requires a lump-sum back-premium payment plus interest, but locks in a lower long-term rate.

Annually Renewable Term (ART) and Reentry

Annually Renewable Term (ART), also called yearly renewable term, renews each year at an increasing premium reflecting one additional year of age. A reentry term feature offers lower renewal rates if the insured periodically re-qualifies by submitting new evidence of insurability; failing to requalify pushes the insured to higher guaranteed rates.

ART illustrates the pure cost of insurance most clearly: each year's premium approximates the true mortality cost for that age. Level term, by contrast, averages those rising yearly costs into one fixed payment over the chosen term—a level-premium concept identical to whole life but limited to the term period.

Re-entry vs. Guaranteed Rates

Many term contracts publish two premium scales: a low current (select) scale available only if the insured periodically proves continued good health, and a higher guaranteed scale that applies if the insured cannot requalify. Candidates should recognize that the low advertised rate is conditional, not guaranteed for the life of the contract.

Comparing Term and Permanent

Term is ideal when the need is temporary and large—young families, mortgages, and business loans—because it maximizes face amount per premium dollar. Permanent coverage fits lifelong needs such as final expenses and estate liquidity.

Common Exam Traps

• Term builds no cash value. Any answer claiming loan or surrender value for term is wrong.
• Renewable means no new evidence of insurability, but the premium rises by attained age.
• Convertibility converts term to permanent, not to a different term length.
• Return-of-premium (ROP) term refunds premiums if the insured survives the term; it costs more than level term.

Re-Entry and Suitability

Term's chief advantage—low cost—comes with two suitability cautions exam writers emphasize. First, an insured who develops a health condition may be unable to buy new term at the end of the period and must rely on renewal or conversion rights already in the contract. Second, term provides no funds for permanent needs (final expenses, estate liquidity) that exist regardless of when death occurs. Recommending term for a lifelong need, or permanent insurance for a purely temporary need, is a classic suitability error.