Between term and permanent life insurance, term is usually the product of choice when it comes to breadwinners providing protection for surviving dependents. The main reason being that term offers the greatest amount of coverage for the lowest initial cost. For example, currently a 30 year old purchasing $1 million face amount of term-10 can be covered for as low as $43.20/month (1). This presents excellent value when compared to an equivalent amount of whole life, which costs $478.80/month (2).
Although term has a low initial cost, its premium rises at the end of the term when it is up for renewal. Some of you reading this may be in a situation where you have to make a decision when your policy is up for renewal in a year or two. Perhaps you’ve seen the increased rates and are hesitant to commit to renewal. Besides simply renewing the term and paying the increased premium, there are several other term insurance renewal options that you can employ.
Term insurance renewal options
Renew and reduce coverage: The most basic and likely most common option is to renew your term insurance policy at the increased cost. Using the above example, the insured will pay a renewal cost of $201.6/month at age 40, an increase by a factor of almost 5. It’s unlikely your income would have also increased by the same factor, so the renewal premium will now take a significantly larger percentage of your budget, all while insuring you for the same amount. The older you are when you first acquired your insurance policy, the more pronounced the jump in premium. So a 20 year old renewing at age 30 isn’t likely to face as large a rate hike as a 50 year old renewing at age 60.
Most insurance companies allow you to reduce your face amount if you give them a notice. This may come in handy because there is a possibility that you won’t need as much insurance as you age, which is supported by the fact that the older you are, the less income replacement your dependents need. Also, your debt level may also have gone down, resulting in less insurance needed to cover it. The impact of the premium increase at renewal can be partially alleviated by simultaneously reducing the face amount.
Apply for a new term policy: The renewal premium that the insurance offers is set at the outset of policy issue and assumes that people who are more likely to renew are those who would have a difficult time qualifying for a new policy. These people would be considered high risk by an insurance company. If they were to apply for a new policy, they would be offered a rated policy or be declined. Therefore, the ‘only high risk individuals renew’ factor is already built into the price, resulting in a high renewal premium.
If you have taken care of your body and maintained your lifestyle, you would likely be able to qualify for a new policy at the same health class as before. A 40 year old can apply for a new policy and pay only $57.60/month (1), an increase of only 33%. Of course, the premium is quoted using today’s rates. In 10 years time, nobody knows how life insurance rates will change, and the actual savings may end up being less due to inflation and claims experience.
If you are applying for a policy now in anticipation of using this option at renewal time, keep in mind that the success rate of this option depends on your health and lifestyle and is not 100% reliable.
Cancel: Another option at your disposal is to let the policy lapse. Perhaps you only bought life insurance to cover your mortgage, and having paid it off after 20 years, you no longer need life insurance. This option is more applicable if your initial term was a lengthy one, such as 20 or 30 years, since as mentioned above your insurance needs diminish as you age.
You may also find that you are able to self-insure, meaning that your assets have grown to an amount that is sufficient for your dependents to survive on should you pass away. Your assets should be able to cover at least final expenses, debt repayment and income replacement until your children are independent.
Conversion to permanent insurance: A crucial feature available to term policy owners at the outset is the ability to convert to a permanent policy, usually up to a certain age, such as 65 or 70. One of the most important uses of permanent life insurance is estate preservation, which ensures that taxes do not erode your estate to nothing. With term insurance that expires at age 80 or 85, there’s no guarantee that the death benefit will be there when you need it for estate preservation. Besides, term renewal rates at that age will be prohibitively expensive and in all likelihood the policy will lapse.
Those with an existing term policy and unable to get approval for a new permanent policy will have no choice but to convert term into permanent. The premium for the converted permanent policy is based on the attained age, which is the age at conversion, and not the age at issue.
As you can see, you have many options when it comes to your term insurance renewal. If you are young and live a healthy lifestyle, your best bet would be the second option, where you apply for a new policy to replace your old one. Feel free to ask us if you have an upcoming renewal and need advice.
1. Quote from Equitable Life. Rates are current as of September, 2014.
2. Quote from SSQ Insurance. Rates are current as of September, 2014.