United States
Hong KongTerm life: level, decreasing, return of premium and annually renewable
The outline names four: level, decreasing, return of premium and annually renewable. Term has no cash value and pays only if death occurs within the period. Level keeps the face amount constant, decreasing does not, and annually renewable keeps the face amount constant while the premium climbs each year.
Term questions are easy marks that candidates give away, and they give them away for one reason: they read the word level and stop. Level what? Face amount and premium are two different things, and the four term types in the outline are distinguished by which of them holds still.
Which thing is level
| Type | Face amount | Premium | Typical use |
|---|---|---|---|
| Level term | Constant | Constant for the term | Income replacement for a fixed period |
| Decreasing term | Falls on a schedule | Constant | Covering a mortgage or amortizing debt |
| Annually renewable term | Constant | Rises each year with attained age | Short need, or coverage while shopping |
| Return of premium term | Constant | Higher than plain level term | Someone who wants premiums back if they survive |
Two rows have a constant premium and a constant face amount. Two do not. Any stem that describes a falling benefit is decreasing term, and any stem that describes a premium that goes up every year without underwriting is annually renewable term. Those two sentences answer most of what this heading produces.
What term never does
- It builds no cash value, so there is nothing to surrender, borrow against or take a nonforfeiture option on.
- It pays nothing if the insured survives the period, with return of premium as the deliberate exception.
- It does not endow or mature at an age.
- It cannot be exchanged for a permanent policy unless it carries the convertible feature.
The absence of cash value is the fact that reaches furthest. Section II is worth 15 questions and a good share of it covers nonforfeiture options, policy loans and dividends, none of which apply to a term contract. A stem that hands you a term policy and asks about its cash surrender value is testing exactly that.
Return of premium, which is stranger than it looks
Return of premium term pays the face amount on death within the period and pays back the premiums if the insured is alive at the end. It costs materially more than plain level term for the same coverage, and the returned premiums carry no interest. The outline lists it as a term type rather than a rider, so treat it as a product in its own right.
Annually renewable term as the pricing baseline
Annually renewable term is the purest expression of what life insurance costs: a one-year contract, renewed each year at the price for that attained age, with no new evidence of insurability required. Premiums rise every year, gently at first and steeply later. Every other life product is a way of smoothing that curve, and level term is the simplest of them.
That framing is worth more than it looks on a section worth 15 questions. It explains why level term costs more than annually renewable term in the early years and less in the later ones, and why a whole life premium looks expensive against a term quote at the same age.
A client wants coverage for a debt that falls to nothing over the next fifteen years, with a payment amount she can budget for. Which contract matches?
- Annually renewable term, because the premium tracks the falling risk
- Decreasing term, because the face amount tracks the falling debt
- Level term, because the premium is constant
- Return of premium term, because she recovers her outlay
The two features listed separately
Under term, the outline lists types and then special features, and the features are renewable and convertible. They are not types of term. They are options that attach to term contracts, and they are the highest-value pair in section I because the words sound interchangeable and are not. We separate them properly in renewable against convertible.
The opinion
Spend a third of your term study time on the renewable and convertible pair and the rest on the four types, not the other way round. The types are separable on a single table you can rebuild from memory in a minute. The features are where the exam earns its money, because they are the part a candidate can half-know and still feel confident about.
The concession: we have no sight of a live form, so we cannot tell you the exact term share of the 15 questions in section I. Counting sub-items, term is the largest heading in the section, which is why we would not skip it. That is arithmetic on Pearson's own list rather than a published weight.
Common questions
Does term life build cash value?
No. Term pays a death benefit only if the insured dies within the period, and it has no cash value at any point. That means no policy loan, no partial surrender and no nonforfeiture option, which is a common exam trap when a stem mixes a term policy with a section II provision.
What is the difference between level and decreasing term?
The face amount. Level term keeps it constant for the whole period; decreasing term reduces it on a schedule, usually to match an amortizing debt such as a mortgage. Both charge a level premium, which is what makes the pair easy to confuse in a stem describing a fixed payment.
Why does annually renewable term get more expensive every year?
Because it is priced at the insured's attained age each year and mortality cost rises with age. The trade is that renewal needs no new evidence of insurability, so a person whose health has deteriorated can still renew. It is the cheapest coverage early and the most expensive later.
Is return of premium term worth it?
That is a suitability judgment rather than an exam answer, and the exam only asks what the product does: it pays the face amount on death within the period and refunds premiums, without interest, if the insured survives it. The premium is materially higher than plain level term for the same face amount.