Term life insurance types

Term life: renting the death benefit

Term life insurance is pure protection for a stated period. The insurer promises to pay the face amount if the insured dies while the policy is in force; if the insured is alive when the term ends, the contract simply expires and nothing is paid back. There is no cash value to borrow against and no savings element to surrender. Because the premium buys nothing but mortality risk for a limited window, term is the cheapest way to buy a large death benefit at younger ages -- and the reason it is the standard answer for a temporary need: a mortgage, the years until the children finish school, a business loan, a buy-sell obligation.

Term policies are classified along two independent axes: what happens to the death benefit over the term, and what happens to the premium. Exam questions almost always turn on one of those two, so keep them separate in your mind.

Classified by death benefit

• Level term. The face amount stays the same for the whole term. This is the ordinary

case, and what "20-year term" means without further qualification.

• Decreasing term. The face amount declines on a schedule while the premium stays level.

It is built to track a shrinking obligation -- the classic use is mortgage protection, where the benefit steps down roughly with the loan balance. Credit life insurance, which pays the remaining balance of a debt to the creditor, is decreasing term sold on the same logic, with the coverage term tied to the term of the indebtedness.

• Increasing term. The face amount rises over the term, usually by a stated percentage or

with an inflation index. It rarely stands alone; it shows up as a rider, and as the mechanism inside a return of premium design, where the growing benefit funds the premium refund.

Classified by premium

• Annual renewable term (ART). A one-year policy the owner may renew each year without

evidence of insurability. The premium is level for that year only and rises every renewal with the insured's attained age. Cheapest at the start, steepest over time.

• Level premium term. The premium is averaged and held level across a longer period --

10, 15, 20, or 30 years are typical. The early premiums overpay for the mortality risk and the later ones underpay, which is what keeps the quoted number flat. At the end of the level period, many contracts continue on an annually renewable basis at a sharply higher attained-age rate, which is why the level period, not the maximum coverage age, is the number that matters.

The two features that carry the exam weight

Renewability lets the owner continue coverage at the end of the term without proving insurability -- the whole point, since the person most likely to need renewal is the person who can no longer qualify. Renewal is at the insured's attained age, so the premium goes up, and the right usually stops at a stated maximum age.

Convertibility lets the owner exchange the term policy for a permanent one, again with no evidence of insurability, within a stated conversion period. The new premium may be set on an attained age basis (priced at the age at conversion -- the common default) or an original age basis (priced back at issue age, which costs a lump-sum catch-up payment for the difference). Convertibility is what turns a cheap temporary policy into an insurability guarantee, and it is frequently the correct answer when a question describes a now-uninsurable insured who still holds term coverage.

A related trap: re-entry term offers a lower rate to an insured who re-qualifies with fresh evidence of insurability at the end of a period. That is the mirror image of renewability -- the discount exists precisely because the insurer is underwriting again, and an insured whose health has declined pays the higher guaranteed rate instead.