Term life insurance usually has a feature built into the contract known as a renewal option or renewal privilege.  This usually gives the policy owner the right to renew a term life insurance contract for an additional period equal to the period for which the contract was originally written.  You can renew the contract without any additional medical information or medical exams, there is no underwriting on the renewal.  Thus, a 5 year term life insurance contract can be renewed for another 5 years, and a 10 year term life insurance contract can be renewed for an additional 10 years, all without providing any proof of insurability.  Why is this good?

The Benefit Of The Renewal Option

Let’s say that you buy a term life insurance policy, and right before it expires you have a heart attack.  Depending upon your age and health, getting a new life insurance policy will be extremely difficult at least, and maybe impossible.

The renewal privilege prevents you from needing a new policy.  You can simply renew your existing term policy and the life insurance company can not deny you the coverage.

No Evidence Of Insurability Needed

In contrast to taking out a new policy, the insured does not need to provide any evidence of insurability in order to renew an existing term policy.  This is what gives the renewable feature so much value.  It is not the value of a “reduced hassle” to extend the contract rather than get a new one, but the ability to retain life insurance coverage no matter how bad the health of the insured person is.  The life insurance company must accept the risk and provide coverage as long as the insured is within the allowable age limits.

If you are choosing to renew a term life policy you will not need to answer any medical questions, undergo any kind of blood work, or any type of exam at all.  As long as you have made all of your premium payments in a timely enough manner so that your life insurance coverage is not lapsed, you can extend the contract by the length of the renewal period (or until the maximum age, whichever is shorter).

Not All Term Is Renewable

A life insurance company is not required by law to have the renewal privilege included in a policy.  In fact, longer length term policies such as 30 year term often do not have a renewable feature.  Always ask your agent and read your policy, they can indicate if your coverage is renewable.  If it does not expressly grant you the option to renew in your physical printed policy, you probably do not have the renewal privilege as a part of your policy.  If you are unsure you can usually call your life insurance companies service line, and they will be able to tell you if you can renew your policy or not.

 Same Face Amount

The amount that you will be covered for will be exactly the same as the amount of the face value of the original contract.  In other words, the life insurance company is not allowed to reduce your coverage because you choose to renew the contract for an additional term.

Maximum Age Limit

A renewal is usually valid until you reach a certain age.  Most contracts are not renewable if the insured person is past the age of 80 (and possibly lower depending upon the contract).  If you renew before the 80th birthday, but the length of the coverage is such that it would extend beyond the insured’s 80th birthday, the coverage will cease on the policy anniversary which follows the insured reaching the maximum allowable attained age.

Under this provision, the policyowner has the right to renew the policy at the end of each succeeding period of coverage, except that he cannot renew it to extend past the insured’s maximum attained age.

The Downside- Higher Costs

The downside of choosing a life insurance renewal is that the cost of insurance is almost certain to be higher than the original level premium.  A higher premium is charged at each renewal period as reference by the policy.  The cost of renewal is quoted to you in your illustration, and you can ask the life insurance company for a quote on exercising the renewal option or for an inforce illustration.  It may also be quoted to you in what is called a “table of renewal premiums”.

Premiums sometimes rise quite significantly when you choose to extend coverage through the renewal privilege, so you should always be aware of the cost before deciding to extend your coverage under your existing policy.  The reason the price is so much higher is because no underwriting (evidence of insurability) is needed to extend the contract.

Why Costs Rise- Adverse Selection

The reason that it is much more expensive to renew the policy than the original face is twofold, but one factor has a much more powerful effect on the premium increase than the other.

  1. The policy was written and priced for a certain duration, and a longer term would have resulted in a higher price at the time of issue.  This is simply to reflect the fact that the longer someone is covered, and the older they are when the coverage ends, the more likely that the life insurance company will have to pay out a claim.  As we get older, our risk of dying goes up.  Life insurance policies are priced taking the duration of the coverage length under careful consideration, and a longer coverage period always results in higher premiums.
  2. The reason that the costs rise so sharply is mostly due to the principal of adverse selection.  Most people who are in good health when a life insurance policy ends will get a new policy.  This is even more so because premiums on new policies are so much less than renewal premiums.  Only people who are in the worst health and are likely not insurable would rationally choose to renew their contracts.  Because the pool of people who exercise the renewal premiums have an extremely high likely hood of having major health issues (and therefore of dying while insured) the life insurance company must price this pool of people at a higher rate.  Even so, the ability to keep coverage at any price is very valuable for uninsurable people.

Must Renew By Time Term Expires

If you suspect that you may not be able to get a new life insurance policy because of a medical issue, you should be aware of the allowable time in which you can choose to renew your existing policy.  Most companies require the decision within 30 days of the expiration of the original term policy, but this can vary by company.  Always make preparations to investigate your insurability before you run out of time.

If you are able to get a new policy through underwriting, you will probably want to stick with the new policy because of the lower price.  If you are not able to get a new policy, you will want to renew your existing coverage before your right to renew expires.  You also do not want to be caught in a situation where you are forced to renew your coverage because you do not yet have a decision from underwriting on a new issue.  Always give yourself and the life insurance company plenty of time to assess your insurability for a new policy before your right to renew ends.

Should You Renew Your Existing Policy

You should not renew your existing policy unless you are unable be issued a new policy because of the higher price.  While you should always compare quotes on prices, you will almost always find that you save money with a new policy versus renewing an existing policy.  Things to remember:

  • You can apply for a new policy while you have existing coverage.  Do this plenty of time before your existing policy lapses so that you know if are required to renew your policy.  You are not even required to accept the new policy, and many companies will even do an underwriting review before you apply as a courtesy.
  • Do you need the life insurance coverage at all?  Sometimes you may have enough in savings, or you may have other insurance protection which render the policy superfluous in the first place.
  • How much coverage do you need?  Have you looked at no medical exam policies, or at insurers who specialize in underwriting high risk clients?
  • If you need the coverage, and renewing a policy is your only option, sometimes it is best to pay the higher price.  At least your family will have the financial security your policy provides.

The Renewal Privilege Is Valuable

Despite the high costs, it should be very clear to you that the option to extend your coverage beyond the intended end date without providing evidence of insurability is extremely valuable.  If you are in bad health, this may be the only way to provide financial protection to your family.  Be glad that the feature is a part of your contract and use it if you must, but be aware that you are paying a high annual charge for better or for worse.

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