Term life insurance types

Lesson 29 of 105 · All lessons · Up next: Term life renewability and convertibility features →

What term insurance is

Term life insurance gives pure protection for a specified period. The period can be as short as one year, a set number of years (5, 10, 20), or to a stated age such as 80. If the insured dies during the term, the insurer pays the face amount to the beneficiary. If the insured outlives the term, nothing is paid. As a rule, term policies have no savings element and no cash value, so a term policy that is not paid generally lapses with nothing to give back.

Because it buys only the death benefit, term is the lowest-premium way to buy a large amount of coverage at younger ages. The trade-off is that term rates rise as the insured gets older, each time a new period starts.

The three shapes of the death benefit

Term policies are classified first by what the face amount does over the term.

Three small charts sit side by side, each plotting the death benefit against time, and each ends at a dashed red line marking the end of the term. The first chart, level term, shows a flat blue line: the face amount stays the same for the whole term, and the premium is level. Its typical use is income replacement. The second chart, decreasing term, shows a green line sloping down: the face amount falls over the term while the premium stays level. Its typical use is mortgage protection and credit life. The third chart, increasing term, shows an orange line sloping up: the face amount grows over the term, and it is usually sold as a rider, for inflation protection or a return of premium rider. A line across the bottom reads: no cash value in any form; outlive the term and nothing is paid. — Level, decreasing and increasing term: the death benefit's shape over the term

Level term. The death benefit stays the same from the first day to the last. Premiums are usually level too, locked in for the guarantee period (for example, a 20-year level term). The longer the premium guarantee, the higher the starting premium. Level term fits a need that stays constant, such as replacing income while children are young.
Decreasing term. The death benefit declines over the term, usually monthly or yearly, while the premium stays level. It fits a debt that shrinks, so it is the classic form of mortgage protection and credit life insurance, which pays off the outstanding balance of a loan if the borrower dies. Credit life is usually written on a group basis to the creditor, and the creditor is the beneficiary.
Increasing term. The death benefit grows during the term, by a fixed amount or a percentage, often to offset inflation. It is most often sold as a rider, such as a cost of living rider or a return of premium rider that adds the premiums paid to the death benefit.

Term by how the premium behaves

Annually renewable term (ART), or yearly renewable term (YRT). The simplest term: one-year coverage that the owner may renew each year without new evidence of insurability. The premium rises every year with attained age, so it starts very cheap and becomes expensive later.
Level premium term. The premium is fixed for a multi-year period (10, 20 or 30 years). At the end, the policy either expires or renews at a much higher rate based on the insured's age then.
Return of premium (ROP) term. Level term with a higher premium that refunds the premiums paid if the insured survives the term. It is still term: no cash value builds that the owner can borrow, and if it lapses early the refund is usually lost or reduced.

Term is temporary protection. Permanent insurance (whole life and its variations) lasts for life and builds cash value; term does neither.

Features that connect to the next lesson

Many term policies are renewable (extendable without proving insurability) and convertible (exchangeable for a permanent policy without proving insurability). Those features are covered in detail separately. For now, remember the classification: level, decreasing, or increasing benefit; level or annually rising premium; and no cash value in any of them.

Key terms

Sample questions

Which statement best describes term life insurance?

It provides lifetime protection and builds a guaranteed cash value.
It pays the face amount whether the insured dies during the term or survives it.
It combines a death benefit with a savings account the owner controls.
It provides protection for a specified period and pays only if the insured dies during that period.

Reveal answer

Correct answer: It provides protection for a specified period and pays only if the insured dies during that period.

Term insurance is temporary protection for a specified period, such as one year, a set number of years, or to a stated age. The insurer pays the face amount only if the insured dies within that period; if the insured outlives it, no benefit is payable.

Dana bought a 20-year level term policy at age 35. She is alive and well at age 55 when the term ends, and she did not renew or convert it. What does the insurer owe?

The face amount, because she paid every premium
Nothing, because she outlived the term period
A refund of all premiums paid, less expenses
The cash value accumulated over 20 years

Reveal answer

Correct answer: Nothing, because she outlived the term period

A term policy pays only if the insured dies during the term. Dana survived the 20-year period, so the coverage simply expires and no benefit is payable. An ordinary level term policy has no cash value and no premium refund.

Which type of term insurance has a death benefit that declines over the term while the premium stays the same?

Decreasing term
Level term
Increasing term
Annually renewable term

Reveal answer

Correct answer: Decreasing term

Decreasing term coverage falls over the term, usually monthly or yearly, while the premium remains level. That pattern matches a debt that is being paid down.

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