Chapter 5

LOMA 280

Principles
of
Insurance

CHAPTER 5

Term Life Insurance

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Chapter 5

Needs Met by Life Insurance

Personal Needs
Some of the typical personal needs that life insurance
can meet are

Dependents’
support

Estate planning

Debts and final

expenses

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Chapter 5

Needs Met by Life Insurance

Business Needs
Life insurance can meet two main business needs:

Business continuation needs

A life insurance policy can provide funds to ensure
that a business continues in the event of the death
of an owner, partner, or other key person.

Employee benefit needs

A business can purchase life insurance to provide
benefits for its employees.
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Chapter 5

Characteristics of Term Life

Insurance Products
The length of the policy term varies considerably
from policy to policy, and can be shown as either
 A specified number of years
For example, a policy may specify a term of
1 year, 5 years, 10 years, or 20 years (generally
speaking, insurers seldom sell term life insurance
to cover periods of less than 1 year).
 A specified age the insured has reached
For example, a term insurance policy may cover an
insured until age 65 (referred to as term to age 65).

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Chapter 5

Plans of Term Life

Insurance Coverage
By far, the most common plan of term insurance is level
term life insurance, which provides a policy benefit
that remains the same over the term of the policy.

Example: Under a 5-year level term policy that provides

$100,000 of coverage, the insurer agrees to pay
$100,000 if the insured dies at any time during the 5-
year period that the policy is in force.

The amount of each renewal premium payable for a

level term life insurance policy usually remains the
same throughout the stated term of coverage.

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Chapter 5

Plans of Term Life

Insurance Coverage
Decreasing term life insurance provides a policy benefit that
decreases in amount over the term of coverage. The policy
benefit begins as a set face amount and then decreases over the
policy term according to a stated method in the policy.

Example: Under a 5-year decreasing term policy that provides a

1st year benefit of $50,000 and decreases by $10,000 on each
policy anniversary, the insurer agrees to pay, while the policy is in
force:
$50,000 if the insured dies during the 1st policy year
$40,000 if the insured dies during the 2nd policy year
$30,000 if the insured dies during the 3rd policy year
$20,000 if the insured dies during the 4th policy year
$10,000 if the insured dies during the 5th policy year
Coverage ends at the end of the 5th policy year.

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Chapter 5

Plans of Term Life

Insurance Coverage
The amount of each renewal premium payable for a
decreasing term life insurance policy usually remains
level throughout the policy term.
Insurers offer several plans of decreasing term
insurance, including
Mortgage
insurance
Credit life
insurance
Family income
insurance

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Chapter 5

Plans of Term Life

Insurance Coverage
mortgage insurance: a plan of decreasing term insurance
designed to provide a benefit amount that corresponds to
the decreasing amount owed on a mortgage loan

 The term of a mortgage policy is based on the length of

the mortgage, usually 15 or 30 years.
 Renewal premiums are generally level throughout the
term.
 In most instances, the life insurance policy is
independent of the mortgage—the institution granting the
mortgage is not a party to the insurance contract.
 The beneficiary is not required to use the proceeds of the
policy to repay the mortgage.

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Chapter 5

Plans of Term Life

Insurance Coverage
joint mortgage insurance: a variation of mortgage
insurance which provides the same benefit as a
mortgage insurance policy except the joint policy
insures the lives of two people
 If both insureds survive until the end of the stated
term, the joint mortgage policy expires.
 If one of the insureds dies while the policy is in
force, the insurer pays the policy benefit to the
beneficiary (typically the surviving insured).

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Chapter 5

Plans of Term Life

Insurance Coverage
credit life insurance: a type of term life insurance
designed to pay the balance due on a loan if the
borrower dies before the loan is repaid
 Unlike mortgage insurance policies, credit life
insurance policies always provide that the policy
benefit is payable directly to the lender, or
creditor, if the insured borrower dies during the
policy’s term.
 Although credit life insurance is available on an
individual basis, most credit life insurance is sold
to lending institutions as group insurance to cover
the lives of the borrowers of that lender.
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Chapter 5

Plans of Term Life

Insurance Coverage
 The amount of credit life insurance benefit payable is
usually equal to the amount of the unpaid debt; as the
amount of the loan decreases, the face amount of the
coverage decreases.
 Credit life insurance premiums may be level over the
duration of the loan or, in cases in which the amount of the
loan varies, may increase or decrease as the amount of the
outstanding loan balance—and the corresponding policy
benefit—increases or decreases.
 Premiums for credit life insurance may be paid to the
insurance company by the lender or by the insured
borrower; in most cases, the borrower pays the premium to
the lender, which then remits the premium to the insurer.

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Chapter 5

Plans of Term Life

Insurance Coverage
family income coverage: a plan of decreasing term life
insurance that provides a stated monthly income benefit
amount to the insured’s surviving spouse if the insured
dies during the term of coverage
 The longer the insured remains alive during the term
of coverage, the smaller the total amount of benefits
the insurer will pay out.
 Under some family income coverages, the insurer
promises to pay the income benefit amount for at
least a stated minimum number of years if the
insured dies during the policy’s term.

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Chapter 5

Plans of Term Life

Insurance Coverage
Increasing Term Life Insurance provides a death benefit
that starts at one amount and increases by some specified
amount or percentage at stated intervals over the policy
term.

Example: Coverage starts at $100,000 and then increases

by 5 percent on each policy anniversary date throughout the
term of the policy.

 The premium for increasing term insurance generally

increases as the amount of coverage increases.
 The policyowner usually has the option of freezing at any
time the amount of coverage provided by the increasing
term insurance.
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Chapter 5

Renewable Term and Convertible

Term Life Insurance
Term life insurance policies often contain features that allow
the policyowner to continue the life insurance coverage
beyond the end of the original term.

If the policy gives the If the policy gives the

policyowner the option to
continue the policy’s
coverage for an additional
policy term, then the policy is
a called a renewable term
insurance policy.
policyowner the right to
convert the term policy to a
cash value policy, then the
policy is referred to as a
convertible term insurance
policy.

Some policies, called renewable/convertible term insurance

policies, contain both of these features.

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Chapter 5

Renewable Term and Convertible

Term Life Insurance
Renewable term life Evidence of insurability:
insurance policies include a proof that the insured
renewal provision that person continues to be an
gives the policyowner the insurable risk
right, within specified limits,
The insured is not
to renew the insurance
required to undergo a
coverage at the end of the
medical examination or to
specified term without
provide the insurer with an
submitting evidence of
updated health history.
insurability.
Often, all the policyowner
must do to renew the
policy is pay the renewal
premium.

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Chapter 5

Renewable Term and Convertible

Term Life Insurance
Under most renewable term insurance policies, the policyowner
has the right to renew the coverage for the same term and face
amount originally provided by the policy.

Example: A 10-year, $100,000 renewable term policy usually

can be renewed for another 10-year period and for $100,000 in
coverage.

Most insurers allow the policyowner to renew the policy for a

smaller face amount and/or a shorter period than provided by
the original contract, but not for a larger face amount and/or a
longer period.
One-year term policies and riders are usually renewable, and
such coverage is called yearly renewable term (YRT)
insurance or annually renewable term (ART) insurance.
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Chapter 5

Renewable Term and Convertible

Term Life Insurance
Often, the renewal provision places some limit on the
policyowner’s right to renew. The most common
limitations are:
The coverage may be The coverage may be
renewed only until the or renewed only a stated
insured attains a stated maximum number of
age times

Example: The renewal provision of a policy may specify

that the coverage is not renewable after the insured has
reached age 75. Another policy may specify that the
coverage is renewable no more than three times.

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Chapter 5

Renewable Term and Convertible

Term Life Insurance
The renewal premium rate is based on the insured
person’s attained age—the age the insured has
reached (attained) on the renewal date.
 As people age, mortality rates and the insured’s
mortality risk increase.
 As people age, renewal premium rates also
increase.
 The renewal premium rate remains level throughout
the new term of coverage.

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Renewable Term and Convertible

Term Life Insurance
 The renewal feature can lead to antiselection.
 Insureds in poor health are more likely to renew
their policies because they may not be able to
obtain other life insurance.
 Because of this risk of antiselection, the premium
for a renewable term life insurance policy is usually
slightly higher than the premium for a comparable
nonrenewable term life insurance policy.

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Chapter 5

Renewable Term and Convertible

Term Life Insurance
Convertible term insurance policies contain a conversion
privilege that allows the policyowner to change—convert—
the term insurance policy to a cash value policy without
providing evidence that the insured is an insurable risk.

 Cash value coverage is available if the health of the person

insured by a convertible term policy has deteriorated to the
point that the person would otherwise be uninsurable.
 The premium for the cash value policy cannot be based on
any increase in the insured’s mortality risk, except with
regard to an increase in the insured’s age.

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Chapter 5

Renewable Term and Convertible

Term Life Insurance
 As in the case of the renewal provision, the
conversion privilege can lead to antiselection.
 Insureds in poor health are more likely to convert
their coverage because they may not be able to
obtain other life insurance.
 Because of this risk of antiselection, the premium
for a convertible term life insurance policy is
usually higher than the premium for a comparable
nonconvertible term life insurance policy.

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Chapter 5

Renewable Term and Convertible

Term Life Insurance
Conversion may not be permitted
After the insured attains a After the term policy has
stated age or been in force for a specified
time

Example: A 10-year term policy may not permit conversion after the
insured has attained age 65 or may only permit conversion during
the first 8 years of the term.

Conversion also may be limited to an amount that is only a

percentage of the original face amount.
Example: A 10-year term policy may permit conversion of 100
percent of the face amount within the first 5 years of the 10-year
term, and a smaller percentage, such as 50 percent, if the policy is
converted during the last 5 years of the 10-year term.
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Chapter 5

Renewable Term and Convertible

Term Life Insurance
Premiums for a converted policy depend on the type of
conversion.
Under an attained age conversion, the renewal
premium rate is based on the insured’s age when the
coverage is converted.
Under an original age conversion, the effective date of
the cash value life insurance policy is considered to be
the date on which the policyowner purchased the original
term insurance policy; as a result, the premium rate for
the cash value policy is based on the insured's age at
the time the original term insurance policy was
purchased.

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Chapter 5

Return of Premium Term Insurance

(ROP)

Return of Premium is a form of term life insurance

that provides a death benefit if the insured dies using
the policy term and promised a return of premiums if
insured does not die during the policy term

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Chapter 5

End of Chapter 5

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