Quick Answer
Term life provides death-benefit protection for a stated period and generally has no cash value. Level, decreasing, annually renewable, and return-of-premium designs differ in benefit pattern and premium structure. Renewal and conversion rights may let an owner continue or change eligible coverage under the policy’s terms.
How Do the Term Designs Differ?
The death benefit is the amount payable after a covered death. The premium is the amount paid to maintain coverage. Compare their patterns separately.
| Design | Benefit pattern | Premium or refund feature |
|---|---|---|
| Level term | Keeps the stated death benefit level during the selected period. | Scheduled premiums generally stay level during the selected level-premium period; a later renewal can cost more. |
| Decreasing term | Reduces the death benefit over time, which can match a declining loan balance. | Premiums can remain level even as the benefit falls. |
| Annually renewable term | Provides a level death benefit through successive one-year periods. | Premiums generally rise at renewal based on attained age, meaning the insured's age then. |
| Return-of-premium term | Provides term death protection with a conditional refund feature. | May return specified premiums if the insured survives and meets the contract's requirements; typically costs more than comparable term without the feature. |
Example: A family needs income protection until a mortgage and dependent-care period end. The producer compares a level term period that matches the need with the household's ability to maintain premiums.
- Match both the benefit pattern and the coverage period to the obligation.
- Compare cost, conversion deadline, renewal schedule, and refund conditions before treating two policies as equivalent.
What Do Renewal and Conversion Preserve?
- Renewability lets an eligible owner continue term coverage without new evidence of insurability, meaning proof that the insured still qualifies for coverage. The contract limits renewal periods and ages, and premiums can increase.
- Conversion changes eligible term coverage to an eligible permanent policy without new medical underwriting within specified windows. Underwriting is the insurer's evaluation of the proposed risk.
- Neither right extends beyond the written limits. Conversion can preserve access to coverage after health changes, but the new policy can cost more.
Exam Tip: Gotchas
- Renewability can raise the premium; conversion changes the form of coverage.
Which Time and Cost Limits Should You Check?
- Renewal: Review the future rate schedule and the final age at which renewal is permitted. A right to renew without new health evidence does not promise unchanged premiums or unlimited renewal years.
- Conversion: Identify the conversion deadline separately from the term’s expiration and renewal dates. A policy can remain renewable after its conversion window has closed. Available permanent products and convertible amounts also follow the contract.
- Missing the conversion deadline does not create a right to backdate a request. Check any remaining contractual options and their requirements.
- Review the converted policy's pricing basis. Attained-age pricing uses age at conversion. Original-age pricing uses age at the earlier issue date when the contract offers that method; it can require payment of past-premium amounts described in the contract. The new premium is not automatically the old term premium.
- Return of premium: Compare the extra cost with the actual refund promise. Check which premiums qualify, the survival requirement, how long coverage must remain in force, and any early-cancellation schedule.
- A return-of-premium feature does not make every cancellation eligible for a full refund. Use the contract’s stated percentage and base amount.
- Some return-of-premium term designs build cash value and permit loans. Check the contract’s values and the effect of unpaid debt on any refund; ordinary term coverage generally has no cash value.
- A lower first-year quote may cost more over the needed protection period. Add the applicable years or payment periods when comparing quotes; keep later renewal rates and refund conditions visible.
Refund example: A policy's early-cancellation schedule returns 30% of $4,000 in eligible premiums.
- Identify the eligible base: $4,000.
- Apply the stated refund percentage: $4,000 × 30% = $1,200.
- Include other paid charges only if the contract says they qualify.
What Should You Check on Exam Day?
- Which design has a benefit that declines?
- How does annually renewable term affect premiums?
- How do renewal and conversion rights differ?