Term Life Insurance

What Does Term Insurance Cover?

• Term pays its stated death benefit, the amount payable after a covered death, when the insured dies while coverage is in force during the stated period.
• Ordinary term generally has no cash value, a policy value available under the contract during life.
• Coverage generally ends when the period expires unless an eligible renewal or conversion right is exercised.

How Do the Benefit and Premium Patterns Differ?

• Level term generally keeps the stated death benefit and scheduled premium level during the selected level-premium period. A later renewal can use a higher premium.

• Decreasing term reduces the benefit over time and can match a declining obligation.

• Annually renewable term provides a level death benefit through successive one-year periods, with premiums usually rising at renewal based on the insured's age then.

• Return-of-premium term may return specified premiums if the insured survives to the end of the period and meets the contract's conditions.

• Some return-of-premium designs also build cash value. Check the actual policy rather than assuming every term design has the same values or refund rights.

• This feature generally costs more than comparable term without a return feature.

• The refund condition, policy duration, and amount returned must be checked in the contract.

• Renewal can be useful if the original need continues, but the premium may be substantially higher at the insured's older age.

How Do Renewal and Conversion Differ?

• A renewable feature permits continued coverage for a stated period without new evidence of insurability, meaning proof that the insured still qualifies for coverage.

• The owner still must pay the required premium, and the policy's renewal schedule controls the cost.

• A convertible feature lets the owner exchange eligible term coverage for eligible permanent coverage without new evidence of insurability within a stated window.

• Check the new policy's pricing method. Attained age means age at conversion; an original-age method uses the earlier issue age when the contract permits it and can require the past-premium payment described in that contract. Neither method promises the old term premium.

• Available permanent products, convertible amounts, and deadlines depend on the contract.

• Conversion can preserve insurability when health has changed, although permanent coverage may cost more.

Exam Tip: Gotchas

• Renewable means coverage can continue under the contract; it does not promise a level premium.
• Convertible means the policy can change to eligible permanent coverage; it does not mean the owner receives cash value from the term policy.

How Can You Match the Term to the Need?

Term can fit a temporary need such as income replacement until dependents become financially independent or a loan is paid.

• The applicant should compare the length of the need with the level period, renewal age, conversion deadline, and expected future premium.
• Keep the premium pattern and benefit pattern separate. A policy can have level premiums while its death benefit decreases.

Duration example: A nonrenewable policy covers 10 years, but the need lasts 15 years.

1. Needed period: 15 years.
2. Covered period: 10 years.
3. Uncovered period: 15 − 10 = 5 years.

Benefit-per-premium example: The annual premium remains $500, but the benefit decreases from $150,000 to $100,000.

1. Initial ratio: $150,000 ÷ $500 = $300 of death benefit per premium dollar.
2. Later ratio: $100,000 ÷ $500 = $200 of death benefit per premium dollar.
3. A level premium does not keep that ratio level.

Term is not automatically the cheapest choice across a lifetime.

• If the need continues beyond the term, renewal can cost more, and a new application may be harder to underwrite.
• Compare the total protection period, not only the first premium.

What Should You Check on Exam Day?

• Can you distinguish level, decreasing, renewable, and convertible term?
• What happens when the coverage period ends?