3.3 Term Life Insurance Types and Features

Term life insurance provides a death benefit for a specified period — the term — and nothing if the insured survives it. It is pure protection: it builds no cash value, so it is the least expensive way to buy a large death benefit. Because the probability of death rises with age, term coverage costs more as the insured ages. The exam expects you to know the three death-benefit patterns, the major contract types, and the two features that make term flexible: renewability and convertibility.

The Defining Traits of Term

• Temporary — covers a stated period (1, 5, 10, 20, or 30 years, or to a stated age such as 65).
• Pure protection / no cash value — nothing accumulates; if the term lapses or expires, coverage simply ends.
• Lowest initial premium — dollar-for-dollar the cheapest death benefit available.
• Death benefit only — pays only if death occurs during the term.

Exam Tip: If a question stresses "temporary need" — a 20-year mortgage, raising young children, a business loan — the answer is almost always term.

Death-Benefit Patterns: Level, Decreasing, Increasing

Term policies differ in how the face amount behaves over the term while the premium is typically level.

Level term is the most common; the face amount is constant while the premium is fixed for the level period. Decreasing term pairs a shrinking benefit with a constant premium — classic mortgage protection, because the benefit tracks the declining loan balance; the beneficiary is the named survivor, not the lender. Increasing term raises the benefit over time and is most often seen as a return-of-premium rider or cost-of-living feature, with a premium that rises to match.

Renewable and Convertible Term

Two optional provisions add flexibility and are heavily tested.

Renewability

Annually Renewable Term (ART) — also "yearly renewable term" — lets the policyowner renew each year without evidence of insurability (no new medical exam). Because the insured is one year older at each renewal, the premium increases every year. A renewable term clause more broadly guarantees the right to renew at the end of the term up to a stated age, at the new attained-age rate.

The value of renewability is that a person who becomes uninsurable can keep coverage — the insurer cannot decline the renewal or charge a substandard rate based on health.

Convertibility

Convertible term lets the policyowner exchange the term policy for a permanent (whole or universal life) policy without evidence of insurability. Two conversion-date rules govern the new premium:

• Attained-age conversion — premium based on the insured's age at conversion (lower immediate cost).
• Original-age conversion — premium based on the age when the term policy was issued (higher one-time cost, often a lump-sum back-payment, but a lower ongoing premium).

Trap: Both renewal and conversion waive medical underwriting — that is their entire value to an insured whose health has deteriorated.

Major Term Contract Variations

• Annually Renewable Term (ART): one-year coverage, renewed yearly at rising attained-age premiums; lowest first-year cost.
• Level Premium Term: premium and face level for the whole period (e.g., 20-year level term); the insurer averages the rising mortality cost into a constant payment.
• Return of Premium (ROP) Term: if the insured survives the term, the insurer refunds the total premiums paid; costs more than plain level term and is a form of increasing benefit.
• Term Rider: term coverage attached to a permanent base policy (e.g., a family term rider insuring a spouse/children).

Worked comparison

A healthy 35-year-old wants $500,000 of coverage for 20 years.

• 20-year level term: roughly $300/year, fixed for 20 years — simple and cheapest for the period.
• ART: maybe $180 the first year but climbing every year, eventually exceeding the level-term cost.
• $500,000 whole life: roughly $5,000+/year — builds cash value but is far costlier.

For a defined 20-year need, level term wins on cost. If the need might become permanent, the client should choose convertible term so coverage can be switched to permanent later without a new medical exam.

Renewability and Convertibility Riders

Two features make term flexible. Renewable term lets the owner extend coverage for another term without evidence of insurability, though the premium jumps to the attained-age rate at each renewal. Convertible term lets the owner exchange the policy for a permanent plan without proving insurability; conversion can use the original age (higher premium, may require back-premium) or attained age (current age rate). These features protect an insured who becomes uninsurable, and the 'no evidence of insurability' point is a frequent answer.

Decreasing Term and Mortgage Protection

Decreasing term has a level premium but a declining face amount, commonly used as mortgage protection so coverage tracks a falling loan balance. Increasing term raises the face amount over time (often used as a rider or with a cost-of-living adjustment). Level term keeps both premium and face constant for the term. A common trap: in decreasing term the premium stays level even as the death benefit falls.