Types of Term Insurance
Term life insurance comes in several varieties, each designed to meet different coverage needs. Understanding these types is essential for matching clients with the right policy.
Level Term Life Insurance
Level term is the most common type of term life insurance. Both the death benefit and premium remain constant (level) throughout the term.
How Level Term Works
| Feature | Description |
|---|---|
| Death benefit | Stays the same throughout the term |
| Premium | Stays the same throughout the term |
| Common terms | 10, 15, 20, 25, or 30 years |
Example
A 35-year-old purchases a 20-year level term policy with a $500,000 death benefit and $30 monthly premium. For the next 20 years:
- Death benefit remains $500,000
- Premium remains $30/month
- At age 55, coverage expires (unless renewed)
Advantages of Level Term
- Predictable, budget-friendly premiums
- Simple to understand
- Easy to compare across companies
- Matches coverage to specific time periods (mortgage, child-rearing years)
Annual Renewable Term (ART)
Annual renewable term (ART), also called yearly renewable term (YRT), provides coverage for one year at a time with the option to renew each year.
How ART Works
| Feature | Description |
|---|---|
| Term length | One year |
| Renewal | Guaranteed without new underwriting |
| Premium | Increases each year based on attained age |
| Death benefit | Usually remains level |
Premium Pattern
With ART, premiums start low but increase annually:
| Year | Age | Annual Premium (Example) |
|---|---|---|
| 1 | 30 | $150 |
| 5 | 34 | $175 |
| 10 | 39 | $225 |
| 15 | 44 | $325 |
| 20 | 49 | $500 |
When ART Makes Sense
- Short-term coverage needs (1-5 years)
- Uncertain coverage duration
- When converting to permanent insurance soon
- Supplementing existing coverage temporarily
Exam Tip: ART premiums increase because mortality risk increases with age. The older you get, the more likely you are to die, so insurance costs more.
Decreasing Term Life Insurance
Decreasing term insurance has a death benefit that decreases over time while premiums remain level.
How Decreasing Term Works
| Feature | Description |
|---|---|
| Death benefit | Decreases annually |
| Premium | Stays level throughout the term |
| Common use | Mortgage protection, declining loan balances |
Decreasing Pattern Example
A 30-year decreasing term policy with initial $300,000 coverage:
| Year | Death Benefit |
|---|---|
| 1 | $300,000 |
| 10 | $200,000 |
| 20 | $100,000 |
| 30 | $0 (or minimal) |
Mortgage Protection Insurance
The most common use of decreasing term is mortgage protection insurance:
- Death benefit decreases roughly in line with mortgage balance
- Ensures the mortgage is paid off if the borrower dies
- Beneficiary is often the lender or family
Considerations
- Death benefit declines while premium stays the same
- Level term may offer better value for similar cost
- Good for matching coverage to specific declining debts
Increasing Term Life Insurance
Increasing term insurance has a death benefit that increases over time, typically to keep pace with inflation.
How Increasing Term Works
| Feature | Description |
|---|---|
| Death benefit | Increases at set intervals |
| Premium | May be level or may increase |
| Common increase | Fixed percentage or tied to inflation index |
Uses for Increasing Term
- Protection against inflation
- Growing income replacement needs
- Increasing final expense costs
Return of Premium (ROP) Term
Return of premium (ROP) term refunds all premiums paid if the insured survives the term.
How ROP Term Works
| Scenario | Outcome |
|---|---|
| Insured dies during term | Death benefit paid to beneficiaries |
| Insured survives the term | All premiums returned to policy owner |
ROP Term Features
- Higher premiums than regular term (often 2-3 times more)
- Premiums are returned in full if policyholder lives
- No interest on returned premiums
- Provides "forced savings" element
Example
| Policy Type | 20-Year Premium | Total Paid | At End of Term |
|---|---|---|---|
| Regular term | $40/month | $9,600 | Nothing returned |
| ROP term | $100/month | $24,000 | $24,000 returned |
Considerations
- Higher cost than regular term
- The "return" has no interest component
- Opportunity cost: investing the premium difference may yield more
- Appeals to those who don't want to "lose" premium dollars
Comparison of Term Types
| Type | Death Benefit | Premium | Best For |
|---|---|---|---|
| Level term | Constant | Constant | General protection needs |
| ART | Constant | Increases annually | Short-term or uncertain needs |
| Decreasing term | Decreases | Constant | Mortgage/debt protection |
| Increasing term | Increases | Varies | Inflation protection |
| ROP term | Constant | Constant (higher) | Those wanting premium return |
Key Takeaways
- Level term has constant death benefit and premiums—most popular type
- ART renews annually with increasing premiums based on attained age
- Decreasing term has declining death benefit—commonly used for mortgage protection
- Increasing term provides a growing death benefit to combat inflation
- ROP term returns all premiums if the insured survives—costs more than regular term
- Choose the term type based on the client's specific coverage needs and timeline
In an annual renewable term (ART) policy, what happens to the premium each year?
Decreasing term life insurance is commonly used for:
Return of premium (ROP) term insurance differs from regular term insurance in that:
Which type of term insurance has a level premium but a death benefit that declines over time?
5.3 Term Policy Features
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