Life Insurance Renewal: Is It A Lifetime Commitment?

Life insurance is a legally binding contract that promises a death benefit to the policy owner when the insured person dies. There are two main types of life insurance: term life insurance and permanent life insurance. Term life insurance is designed to last a certain number of years, then end. Permanent life insurance is more expensive than term life insurance but remains in force throughout the insured's entire life unless the policyholder stops paying the premiums or surrenders the policy.

Renewing a term life insurance policy is an option offered by many insurance companies. It allows the policyholder to renew their policy when it's about to expire so that they're not left without coverage at the end of their term. While this option provides peace of mind, it comes with a catch – the renewal rates are often significantly higher than the initial premiums. This is because the insurance company assumes that the policyholder's health may have deteriorated, increasing the risk of a claim. As a result, many people may be better off purchasing a new policy instead of renewing their existing one. However, if an individual's health has declined and they are no longer eligible for a new policy, renewing their existing policy may be their best option to ensure continued coverage.

Renewable term life insurance

Most term life insurance policies are renewable, but not all. The option to renew is beneficial as future health circumstances are unpredictable. However, the initial premiums are likely to be higher than those of a life insurance contract without a renewable term clause. This is because the insurance company must be compensated for the increased risk of the policyholder's potential future health issues.

When a term life insurance policy is renewed, the premium is significantly higher than what was originally paid. The renewal premiums can be up to 20 times more than the initial premiums. This is because the insurance company has no way of knowing the policyholder's current health condition, so they assume that the policyholder's health may have deteriorated, increasing the chance of a claim.

There are a few different types of renewable term life insurance policies. The most common are those that renew at the end of the initial term—at 10, 15, or 20 years. There is also a category of policies that renew annually, with premiums becoming more expensive each year. While the initial cost of premiums in these policies is low compared to typical term policies, they become more costly in the long run.

When considering whether to renew a term life insurance policy, it is important to re-examine why the policy was taken out in the first place and whether the coverage needs have changed. It is also important to assess one's health; unless the policyholder has a health condition that makes them uninsurable, they are likely to find a new term life policy more affordable.

Term life insurance renewal rates

Term life insurance is a type of insurance that provides a death benefit for a specified period of time, which is known as the "term". The duration of the term can vary, with common options including 5, 10, 15, 20, and 30 years. During the term, the policyholder locks in a rate, which is determined based on factors such as age, gender, and health. If the policyholder dies during the term, their beneficiaries will receive the death benefit, which can be used to cover expenses such as healthcare, funeral costs, and consumer debt.

When the term of a policy expires, policyholders have a few options. They can choose to let the policy lapse, apply for a new policy, or renew their existing policy. While renewing an existing policy may seem convenient, it often comes with significantly higher premiums, which can increase by up to 20 times the initial rate. This is because insurance companies assume that the policyholder's health may have deteriorated during the initial term, increasing the likelihood of a claim being made.

Despite the high cost of renewal, there are some situations in which renewing a term life insurance policy may be beneficial. For example, if the policyholder's health has significantly deteriorated since the policy was taken out, they may not be able to qualify for a new policy or may be subject to even higher rates. In this case, renewing the existing policy, despite the increased cost, may be the best option to ensure continued coverage.

It is important to carefully consider your options before deciding to renew a term life insurance policy, as the high renewal rates can quickly become unaffordable. One alternative to renewal is to convert the term policy into a permanent or whole life insurance policy, which provides coverage for the duration of the policyholder's life. However, this option also comes with a substantially higher price tag.

Ultimately, the decision to renew a term life insurance policy depends on individual circumstances, including health, financial obligations, and insurance needs. It is recommended to assess your insurance needs regularly and seek advice from a licensed insurance advisor to make an informed decision.

Automatic renewal

Guaranteed renewability has become standard on most term life insurance products. It allows you to renew your policy at a pre-specified price when it's about to expire. You won't need to go through extra underwriting or show proof of health, which makes this a great option for those who have had a change in health and might otherwise not be eligible for a completely new policy.

However, the convenience of automatic renewal comes with a starkly higher insurance premium compared to what you would pay if you took out a new policy. The renewal premiums can be five to 20 times more than your initial premiums for term insurance. This is because the insurance company assumes that with your increase in age, your health may have deteriorated, or you may have even developed a terminal illness. This will increase the chance of a claim, posing a higher risk for the insurance company that they may pay out a death benefit.

Most companies will allow for the renewal of the policy up to a certain age, such as 70 or 75 years old. Once you reach that age, the policy can no longer be renewed, and the coverage will expire. The latest date by which you can renew your coverage is usually stated in your policy document.

It's important to remember that term life policies renew automatically at the conclusion of their term. So, if you have a 15-year term life plan, the policy automatically renews at the end of that period but at a far higher rate than the initial premium. If you forget to inform the insurance company of your wish to cancel the policy in time, they will happily press the automatic life insurance renewal button.

When to renew

Renewing your life insurance policy is a good idea if your health condition has changed and you still need coverage by the time your term ends. If you've developed a serious illness, such as cancer, and still need coverage, you may not be able to get approved for a new policy. In this case, while a policy renewal will be pricey, it is still more affordable in contrast and will ensure you're still protected, even if you're "high risk".

However, if you don't experience a change in health but still need coverage by the time your term ends, you're probably better off applying for a new policy. Your rates will be more costly because you're older, but clearing the medical exam should keep your costs well below the rate you would pay for a renewal.

It's important to remember that term life insurance policies are designed to cover you for a limited period. Typically, short-term life insurance lasts for 10, 15, 20, 25, or 30 years. So, if your term life insurance policy is approaching the end of its term, you might want to consider your options.

• Know when your policy is set to expire: Keep an eye on the end date of your initial term life insurance policy, as renewals are often automatic. Mark this date on your calendar, and a few months before the term ends, start the process of deciding whether to renew or not.
• Understand your new life insurance needs: Reassess your life insurance needs to understand how much coverage you require and for how long. Your circumstances may have changed since you first took out the policy. For example, your children may now be financially independent, or your mortgage may have been paid off.
• Get quotes from multiple insurers: Once you know your insurance needs, apply for a new policy with multiple insurers and compare their quotes. This will help you make an informed decision about whether to renew your current policy or switch to a new one.
• Ensure your policy is not renewed automatically: Term life policies often renew automatically at the end of their term, usually at a much higher rate than the initial premium. If you don't want to renew, inform your insurance provider in advance, as they will be happy to let the policy renew automatically and collect more premiums from you.

Renewal vs new policy

When a term life insurance policy expires, policyholders have a few options. They can let the policy lapse, they can apply for a whole new policy, or they can renew their existing policy.

Renewing an existing policy is convenient and easy, but it comes with a much higher insurance premium compared to taking out a new policy. When you renew your existing term life insurance, your new premium is significantly higher than what you originally paid. The renewal premiums can be 5 to 10 times more than your initial premiums for term insurance, and in some cases, even 16 times more.

The reason for the higher premium is that the insurance company has no way of knowing your current health condition. They assume that with age, your health may have deteriorated, increasing the chance of a claim. However, renewal may be the best option for those with serious health conditions who may be denied coverage altogether for a new policy.

On the other hand, if you have no major health concerns and your insurance requirements have changed, a new policy may be a better option. You can seek a new term insurance policy for a higher amount, and your premium payment will be lower compared to the one offered at renewal. Additionally, you can save money by reapplying for term life insurance with full underwriting.

In summary, the choice between renewal and a new policy depends on your health and insurance needs. Renewal is convenient and ensures continued coverage, but it comes with a high cost. A new policy may be more affordable and provide better coverage, but it requires undergoing a new application process and medical underwriting.

Frequently asked questions