Policies ·

Term Life Insurance: Matching Coverage to a Time-Limited Need

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Estimated study time. Take the time you need.

What you will learn

Describe what term life insurance covers, for how long, and when its death benefit is paid.
Tell level, decreasing, annually renewable and return-of-premium term apart by reading the benefit and premium terms separately.
Explain how a renewal right differs from a conversion right.
Apply the age and time limits stated in a policy to decide whether coverage, renewal or conversion is still available, without assuming that a renewal premium stays the same.

Before you start

You should be able to tell apart the insured, the policy owner, the beneficiary and the premium payer from Who is insured, who owns the policy, and who receives the money?. Here is a quick reminder:

The insured is the person whose life is covered.
The policy owner controls the policy.
The beneficiary receives the death benefit.
The premium payer pays the charges.

One person can fill more than one role. You will also need ordinary reading and simple arithmetic.

All policies in this lesson are invented examples. Their dollar amounts, ages and deadlines exist only for practice. Real limits come from the specific policy. Do not treat any number in this lesson as a rule that applies to every policy, including every policy sold in Nevada.

The central idea: coverage with an end date

Some money needs last only for a while. A loan gets paid off. Children grow up. A paycheck would be needed only until retirement. Term life insurance is built for needs like these.

Term life insurance covers the insured for a set period called the term. The term might be one year, 10 or 20 years, or until the insured reaches a stated age. If the insured dies during the term, the insurer pays the death benefit to the beneficiary. If the insured is still alive when the term ends, no death benefit is paid. Coverage then stops unless the policy gives a right to continue it.

Most term policies have no cash value. Cash value is an amount the owner could receive by giving up the policy, or borrow against. Term premiums pay for protection during the term. They do not build up a savings balance. That is a major reason term coverage usually costs less at first than permanent coverage, which is designed to last for life and builds cash value.

To decide whether a term policy pays, ask two questions:

Was the policy in force, meaning active and not ended?
Did the death happen inside the coverage period?

Worked case: a 20-year need

Rosa owns a policy on Rosa's own life. Rosa's partner is the beneficiary. The contract excerpt reads:

"Plan: 20-year level term. Death benefit: $300,000. Coverage begins on the policy date and ends on the 20th policy anniversary. Premium: $45 per month, guaranteed for 20 years. This policy has no cash value. This policy has no return-of-premium or other refund feature."

Rosa dies in policy year 12 while the policy is in force. Check the two questions:

Was the policy in force? Yes.
Did the death happen during the term? Yes, year 12 falls inside the 20 years.

So the beneficiary receives $300,000. "Level" means the benefit does not change during the term. The amount is the same in year 12 as in year 1.

Change one fact

Now Rosa is alive at the 20th anniversary. The policy has no renewal right, so coverage ends. Rosa dies in year 21. The beneficiary receives nothing from this policy, because the death happened after the coverage period ended.

A tempting mistake is to think that 20 years of premiums, about $10,800, must be "in the policy" somewhere. They are not. Those premiums paid for 20 years of protection. The policy states it has no cash value, so there is no balance to collect. It also states it has no return-of-premium or other refund feature, so no premiums come back when coverage ends.

Read two schedules separately: benefit and premium

Every term policy answers two separate questions:

How much would be paid at death, and does that amount change?
How much does the coverage cost, and does that cost change?

These schedules do not have to move together. Many beginners go wrong by assuming they do. The type of term tells you mainly how the benefit behaves. Read the premium terms on their own.

Level term

In level term, the death benefit stays the same for the whole term. The premium is a separate matter. Depending on the policy, the premium may be:

level for the entire term,
level only for a stated period and then higher, or
increasing over time.

In the worked case above, the premium was guaranteed level for 20 years because the contract said so. Never assume it from the word "level."

Decreasing term

In decreasing term, the death benefit gets smaller over the term on a schedule stated in the policy. The premium usually stays level. People often use decreasing term for debts that shrink over time, such as a mortgage or a business loan.

Example contract excerpt: "20-year decreasing term. Death benefit in policy year 1: $200,000. The death benefit decreases by $10,000 at the start of each later policy year. Premium: $40 per month, level for the full term."

To find the benefit in a given year, count how many decreases have happened. In year 6 there have been 5 decreases, so the benefit is $200,000 − (5 × $10,000) = $150,000. The premium in year 6 is still $40 per month.

A decreasing benefit does not by itself mean a decreasing premium. In this contract, the premium stays the same while the protection shrinks.

Change one fact: suppose the same person had bought 20-year level term for $200,000 instead. A death in year 6 would then pay $200,000, because a level benefit does not step down.

Annually renewable term

Annually renewable term, also called yearly renewable term, provides coverage one year at a time. The death benefit stays the same. The owner can renew each year without proving good health, up to a maximum age stated in the policy. The premium increases each year, because the insured is older at each renewal.

Example contract excerpt: "Annually renewable term. Death benefit: $250,000. Renewable each policy anniversary through the anniversary on which the insured is age 70. Annual premiums: age 40, $310; age 41, $330; age 42, $355; later ages shown on the premium schedule."

At age 42, the owner pays $355, not the $310 charged at age 40. After the age-70 renewal, no further renewal is available.

Return-of-premium term

Return of premium (ROP) is a feature added to term coverage. It can come as a separate rider, which is an add-on to the policy, or it can be built into the policy. If the insured outlives the term and no death benefit was paid, the insurer refunds all or some of the premiums. Which premiums, how much, and under what conditions vary by policy. A policy with this feature costs more than the same coverage without it.

Example contract excerpt: "20-year level term with return-of-premium rider. Base premium: $600 per year. Rider charge: $250 per year. If the insured is alive and this policy is in force on the 20th policy anniversary, we will refund the base premiums paid. Rider charges are not refunded. No refund is payable if this policy ends before the 20th policy anniversary."

If the insured lives to year 20 with the policy in force, the refund is 20 × $600 = $12,000. The $5,000 in rider charges is not returned, so this is a partial refund, not "every dollar back."
If the owner cancels in year 12, this contract pays no refund at all.

Return of premium does not mean every charge comes back whenever the policy ends. The contract states what is returned and when.

Checkpoint: label the policy

Read each excerpt and name the type of term. Then say whether the premium can be assumed to stay the same.

Policy A: "Death benefit $150,000 throughout the term. Coverage renews each year to age 75. Premium rises each year."
Policy B: "Death benefit begins at $180,000 and decreases each year as shown on the schedule. Premium is $32 per month for the full term."

Answer: Check your reasoning

Policy A is annually renewable term. The benefit is level, coverage renews one year at a time up to a stated age, and the premium rises each year. The premium cannot be assumed to stay the same, because the contract says it rises.

Policy B is decreasing term. The benefit shrinks on a schedule, but this contract fixes the premium at $32 per month for the whole term. If you guessed that Policy B's premium falls as the benefit falls, you mixed up the benefit schedule with the premium schedule. Always read them separately.

Renewal versus conversion

Both rights let the owner keep some coverage without proving good health. That shared feature is why people confuse them. They lead to different results.

A renewal right lets the owner continue term coverage for another term when the current term ends, without proving insurability. Proving insurability means showing, for example through health questions or a medical exam, that the insured is still an acceptable risk. Renewal keeps the coverage as term insurance. The renewal premium will most likely be higher, because the insured is older. Renewal is usually allowed only up to a maximum age. A nonrenewable policy cannot be continued, so the owner would have to apply for a new policy.

A conversion right lets the owner exchange the term policy for a permanent policy, again without proving insurability. Conversion is available only during a period stated in the policy, and that period can end before the term itself does.

The question to ask is: does the owner want more term coverage, or a change to permanent coverage? Each right has its own limit, so check the right clause.

A renewal age limit tells you how long term coverage can keep being renewed.
A conversion deadline tells you how long the owner may switch to permanent coverage.

These are separate dates. Passing one does not mean you have passed the other.

Worked case: two limits in one policy

Jordan owns a policy on Jordan's own life, issued when Jordan was 50. The contract excerpt reads:

"10-year renewable and convertible term. Renewal: at the end of each term, the owner may renew for another 10-year term without evidence of insurability, if the insured is age 70 or younger on the renewal date. The renewal premium is based on the insured's age on the renewal date. Conversion: the owner may convert this policy to a permanent policy without evidence of insurability before the 7th policy anniversary or before the insured's 65th birthday, whichever comes first."

Work out each limit separately.

The first term ends when Jordan is 60.
Conversion: the 7th anniversary arrives when Jordan is 57, which is before age 65. So the conversion window closes at Jordan's age 57.
Renewal: at age 60 Jordan is 70 or younger, so the owner can renew.

At age 59, Jordan wants permanent coverage. Conversion is closed, because the window ended at 57. Renewing at 60 is still possible, but that gives another 10-year term, not permanent coverage. Its premium will be based on age 60, not the premium charged at age 50.

Change one fact

Now Jordan was issued the same policy at age 60.

The first term ends at age 70.
Conversion: the 7th anniversary would come at age 67, but Jordan turns 65 first. Whichever comes first wins, so the window closes at Jordan's 65th birthday.
Renewal at 70: allowed, because Jordan is 70 or younger on that date.
Renewal at 80: not allowed, because Jordan would be past the age-70 limit.

Changing only the issue age changed which conversion limit controls. The 7th-anniversary limit applied the first time, and the age-65 limit applied the second time. It also changed how many renewals are possible. Reading the actual clause, rather than a remembered "usual" deadline, is the only safe method.

Practice: apply what you learned

Work each case using only the information given. Decide before you open the answer.

Case: The shrinking business loan

Priya owns a 10-year decreasing term policy on Priya's own life to protect a business loan. The policy reads: "Death benefit in policy year 1: $100,000. The benefit decreases by $10,000 at the start of each later policy year. Premium: $25 per month, level for the full term." Priya's business partner says, "By year 8, you must be paying much less, since the coverage is smaller." What is the death benefit in year 8, and is the partner right about the premium?

Answer: Compare your reasoning

By year 8 there have been 7 decreases, so the benefit is $100,000 − (7 × $10,000) = $30,000. The partner is wrong about the premium. This contract keeps it at $25 per month for the full term. Decreasing term describes the benefit schedule. Here the premium is level, which is the usual arrangement for decreasing term. The partner assumed the two schedules move together.

Case: One more year of coverage

Sam owns an annually renewable term policy. The death benefit is $200,000. The policy is renewable each anniversary through the anniversary on which the insured is age 75. Sam paid $1,900 for the year beginning at age 72. Sam is about to turn 73 and expects to pay $1,900 again. Can the policy be renewed at 73, and what should Sam expect about the premium?

Answer: Compare your reasoning

Yes. Age 73 is within the age-75 limit, so the policy can be renewed without proving good health. Sam should not expect $1,900. Annually renewable term premiums increase each year as the insured ages, so the age-73 premium will be higher. Sam should check the premium schedule or renewal notice. The benefit stays $200,000. Renewal will no longer be available after the age-75 anniversary.

Case: Canceling early

Lee bought 20-year level term with a return-of-premium feature. The policy reads: "If the insured is alive and this policy is in force at the end of the 20-year term, we will refund 80% of the premiums paid. No refund is payable if the policy ends before then." After 9 years of paying $500 per year, Lee cancels. Lee expects to get back $4,500. What does Lee receive?

Answer: Compare your reasoning

Nothing. This contract pays a refund only if the policy is still in force at the end of the 20-year term, and it states that no refund is payable if the policy ends earlier. Even a policy that reached the end of the term would have refunded only 80% of premiums, not all of them. The mistake is assuming that return of premium means every charge comes back whenever the policy ends. The contract sets what is returned and when.

Case: The wrong right

Morgan, age 64, owns a 15-year term policy issued at age 55. The policy says: "Renewable for additional 5-year terms without evidence of insurability while the insured is age 80 or younger on the renewal date. Convertible to a permanent policy without evidence of insurability before the insured's 62nd birthday." Morgan now wants permanent coverage. A friend says, "You can renew until 80, so you still have plenty of time to convert." Is the friend right?

Answer: Compare your reasoning

No. The friend treated the renewal age limit as if it were the conversion deadline. The conversion right ended at Morgan's 62nd birthday, so at 64 Morgan cannot convert under this clause. Renewal is a different right. When the term ends at age 70, Morgan could renew for 5-year terms while age 80 or younger. That would continue term coverage, not create permanent coverage, and the renewal premiums are likely to be higher.

Case: Ten years of premiums

Alex owns a 20-year level term policy. The contract states that the policy has no cash value and has no return-of-premium or other refund feature. After 10 years, Alex no longer needs the coverage and asks the insurer to "send back the balance I have built up." What will Alex receive, and why?

Answer: Compare your reasoning

Alex has nothing to receive. Two separate contract statements decide this. First, the policy has no cash value, so the premiums paid for 10 years of protection rather than building a balance Alex could collect. That fact alone would not settle the question, because a return-of-premium feature can refund premiums even on a policy with no cash value. Second, the contract states there is no return-of-premium or other refund feature, so no premiums come back either. Alex can stop the coverage, but ending it does not produce a payout.

Recap: what to remember

Term life insurance covers the insured for a stated period. The death benefit is paid only if the insured dies while the policy is in force during that period. Most term policies have no cash value.
Read the benefit schedule and the premium schedule separately. Level term keeps the benefit fixed, but the premium may be level, level for a while, or rising. Decreasing term shrinks the benefit, and its premium usually stays level.
Annually renewable term keeps the benefit level, renews one year at a time up to a stated age, and charges a higher premium each year.
Return of premium refunds all or some premiums after the term ends if no death benefit was paid. It costs extra, and the contract sets exactly what is returned and under what conditions.
Renewal continues term coverage. Conversion exchanges term coverage for permanent coverage. Neither requires proof of good health, but each has its own limit. A renewal age limit is not a conversion deadline.
Always apply the limits written in the specific policy. Expect renewal premiums to rise unless the contract guarantees otherwise.