Term Life Insurance: What It Is, Different Types, Pros and Cons
Term Life Insurance
Term insurance is temporary protection because it only provides coverage for a specific period of time. It is also known as pure life insurance. Term policies provide for the greatest amount of coverage for the lowest premium as compared to any other form of protection. There is usually a maximum age above which coverage will not be offered or at which coverage cannot be renewed.
Term insurance provides what is known as pure death protection:
- If the insured dies during this term, the policy pays the death benefit to the beneficiary;
- If the policy is canceled or expires prior to the insured’s death, nothing is payable at the end of the term; and
- There is no cash value or other living benefits.
There are three basic types of term coverage available, based on how the face amount (death benefit) changes during the policy term:
- Level,
- Increasing, and
- Decreasing.
Regardless of the type of term insurance purchased, the premium is level throughout the term of the policy; only the amount of the death benefit may fluctuate, depending on the type of term insurance. Upon selling, renewing, or converting the term policy, the premium is figured at attained age (the insured’s age at the time of transaction).
Note that the topic of Increasing Term insurance will not be covered further in this course material as it is not required on the state exam outline.
Level Term
Level term insurance is the most common type of temporary protection purchased. The word level refers to the death benefit that does not change throughout the life of the policy.
Annually Renewable Term
Annually renewable term (ART) is the purest form of term insurance. The death benefit remains level (in that sense, it’s a level term policy), and the policy may be guaranteed to be renewable each year without proof of insurability, but the premium increases annually according to the attained age, as the probability of death increases.
Level Premium Term
Level premium term, as the name implies, provides a level death benefit and a level premium during the policy term. For example, a $100,000 10-year level term policy will provide a $100,000 death benefit if the insured dies any time during the 10-year period. The premium will remain level during the entire 10-year period. If the policy is renewed at the end of the 10-year period, the premium will be based on the insured’s attained age at the time of renewal.
Re-entry Option
Some policies contain a re-entry option where the insured, upon the end of a term policy with guaranteed renewable option, may qualify for a discounted premium rate with proof of insurability.
Decreasing Term
Decreasing term policies feature a level premium and a death benefit that decreases each year over the duration of the policy term. Decreasing term is primarily used when the amount of needed protection is time sensitive, or decreases over time. Decreasing term coverage is commonly purchased to insure the payment of a mortgage or other debts if the insured dies prematurely. The amount of coverage thereby decreases as the outstanding loan balance decreases each year. A decreasing term policy is usually convertible; however, it is usually not renewable since the death benefit is $0 at the end of the policy term.
- Select options This product has multiple variants. The options may be chosen on the product page
- Select options This product has multiple variants. The options may be chosen on the product page
- Select options This product has multiple variants. The options may be chosen on the product page
- Select options This product has multiple variants. The options may be chosen on the product page
- Select options This product has multiple variants. The options may be chosen on the product page
- Select options This product has multiple variants. The options may be chosen on the product page
- Select options This product has multiple variants. The options may be chosen on the product page
- Select options This product has multiple variants. The options may be chosen on the product page
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Special Features: Renewable and Convertible
Most term insurance policies are renewable, convertible, or renewable and convertible (R&C).
The renewable provision allows the policyowner the right to renew the coverage at the expiration date without evidence of insurability. The premium for the new term policy will be based on the insured’s current age. For example, a 10-year term policy that is renewable can be renewed at the end of the 10-year period for a subsequent 10-year period without evidence of insurability. However, the insured will have to pay the premium that is based on their attained age. If an individual purchases a 10-year term policy at age 35, they will pay a premium based on the age of 45 upon renewing the policy.
The convertible provision provides the policyowner with the right to convert the policy to a permanent insurance policy without evidence of insurability. The premium will be based on the insured’s attained age at the time of conversion.
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