What should I look for in a renewable term policy?
In addition to the most important feature of a term life policy, guaranteed renewability without a medical exam, there are three other key components to consider:
- The policy term
- Guaranteed level premiums
- Ability to convert to a cash value policy
Before we look at each of these components, it will help to get one basic idea on the table. The key factors that determine insurance premiums are age, cigarette smoking, and general health. As people get older, take up smoking, or decline in health, they become more likely to die, and insurance companies must take in more revenue, in premiums, to cover expenses.
Typically, when you buy a term insurance policy, you lock in a particular rate class that's based on your age, smoking status, and health at the start of the term. When it comes time to renew a term policy, you can't do much about your age. You'll be older, so your rate will be higher. This much is entirely predictable and not worth worrying about or maneuvering to beat.
With this perspective in mind, let's move on to the three key components of a guaranteed renewable term life policy.
1. The policy term
Term policies are either annually renewable (one-year term) or cover terms from five to 30 years (e.g., five, 10, 20, 30). Think of annually renewable term as the basic building block on which longer-term policies are built. If you pick a policy term beyond one year, you get two advantages:
1) The total multiyear premium cost is spread out evenly over the policy term, rather than increasing each year, as you get older. For this reason, these policies are usually called "level term" policies.
2) You can often get a better rate for longer terms, since the insurance company gets better odds that you won't switch policies during the term.
As with everything in life, though, there are trade-offs:
1) When you buy a longer-term policy, it may look like you are paying a level premium, but you are really just over-paying in the early years to cover higher cost