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Some level term life insurance policies may include an option that allows the policy owner to renew the policy before its expiration date without having to provide evidence of insurability. As with the option to convert, the option to renew must be included in the contract when the policy is purchased; it cannot be added later.
Term life insurance policies are renewed using the insured's attained age. The premiums for each renewal period will be higher than those for the initial period, reflecting the insured's increased age and risk. This steady increase in premium is often referred to as a step-up premium (since the insured climbs up another "step" when renewing the policy). The advantage of the renewal option is that it allows the insured to continue insurance protection, even if they have become uninsurable due to a change in health.
Renewal options typically provide for several renewal periods or for renewals until a specified age. However, as premiums increase with each renewal, the policy's cost typically becomes prohibitive, forcing older individuals who are more likely to need the protection to either terminate or not renew the coverage. The option to renew is often combined with the option to convert, in the same term insurance policy.
Annual renewable term (ART) or yearly renewable term (YRT) life insurance provides coverage for one year and allows the policy owner to renew each year without evidence of insurability. This renewal is typically automatic and increases the premium each renewal period. Annual renewable term life insurance represents the most basic form of life insurance.
Re-entry term insurance policies are named for their re-entry feature that offers policyholders two options at renewal time. The first option allows insureds to automatically renew at a standard premium rate without proving insurability. Alternatively, to qualify for the lowest premium rates or receive discounts, an insured can undergo a medical examination to demonstrate their insurability. However, the insured could fail this medical exam or exhibit health issues. In such a case, the insured will not necessarily lose coverage — the insured might still be able to retain the coverage, but only at a higher premium rate.
If an exam question references renewing a life insurance policy, the new premium will ALWAYS be higher than the previous or original premium. The cost of insurance will never stay the same or decrease. Additionally, only temporary coverage can be renewed. There's no need to renew permanent coverage.
Term insurance is designed to terminate after a specified period; however, some level term policies may contain an option that allows the policy owner to convert the term protection to permanent protection. The option to convert must be included in the contract when the policy is purchased and, depending on the insurance company, may specify a time limit for converting (e.g., three years prior to policy expiration) or an age limit for converting (e.g., before the insured reaches age 55). Policies that contain the option to convert are named accordingly — for example, a term policy that provides life insurance protection for 10 years and also has a conversion privilege is referred to as a 10-year convertible term policy.
The option to convert gives the insured the privilege to convert or exchange the term policy for a whole life (or permanent) policy without evidence of insurability. In other words, the insured is not required to pass a medical exam or demonstrate good health since that requirement was already satisfied before the policy was initially issued. For example, if Steve purchased a 15-year term life insurance policy and suffered a massive heart attack 10 years into the policy term, the heart attack would negatively impact his insurability and, due to his increased health risk, it would be unlikely that an insurance company would allow him to purchase a new life insurance policy. When his 15-year policy expires, he would be without life insurance and possibly unable to obtain coverage. However, if Steve had purchased a 15-year convertible term policy, he would have had the option to convert the policy to permanent protection without needing to prove insurability.
Interim term life insurance is a form of convertible term insurance designed for individuals seeking immediate coverage but unable to afford permanent insurance right away. It offers temporary protection with the intention of transitioning to permanent coverage later. Typically, this type of insurance is set up to automatically convert to permanent coverage within the first year. Insurability is assured, with the premium for the temporary coverage calculated based on the original application age, while the premium for the permanent coverage is determined by the age at which the permanent protection starts (the attained age).
Depending on the conversion method, the premium rate for the new whole life policy will reflect the insured's age at either the time of the conversion (the attained age method) or at the time when the original term policy was taken out (the original age method). Attained-age conversion is the usual method for converting term insurance to permanent insurance. When the attained age is used, the policy owner effectively terminates the pure term insurance protection and purchases a new whole life insurance policy without providing any health history information. The new premium is based on the insured's age at the time of conversion.
The insured's age is one of the largest premium factors, so this method results in higher premiums. Most conversions use attained age because when the "original age" is used, the policy owner must pay an amount equal to the difference between the original term cost and the new original-age whole life for the number of years that have passed. Premiums will be lower, but the upfront cost is high. Using the original age method would be more attractive if conversion is requested in the policy's earliest years. The new original-age policy will not automatically have cash value, but may generate more cash value than the attained age method in a comparable time frame.
Assume an exam question is referring to the attained age method if the question doesn't specify the method of conversion.
| Policy | Death Benefit | Premium | Cash Value | Policy Loans | Partial Withdrawals of Cash Value | Surrender Charges |
|---|---|---|---|---|---|---|
| Level Term | Level | Fixed | NO | NO | NO | NO |
| Renewable Term | Level | Fixed per term. Increases each renewal. | NO | NO | NO | NO |
| Convertible Term | Level | Fixed until converted. Converted premiums increase because it is now a permanent policy. | No, until converted | No, until converted | NO | NO |
| Increasing Term | Increases on a schedule | Fixed | NO | NO | NO | NO |
| Decreasing Term | Decreases on a schedule | Fixed | NO | NO | NO | NO |
Consider a client named Stacy, who is 35 years old, has two young children, and is the primary breadwinner in her family. She is trying to decide between permanent (whole life) insurance and term life insurance. Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years, designed to offer financial protection during the years when Stacy's children are dependent on her income. Unlike permanent life insurance, term life does not accumulate cash value, but it is generally more affordable, allowing Stacy to maximize her coverage while managing her budget and choosing a term that aligns with her financial goals, such as covering her children's education expenses or paying off the mortgage.
While term insurance might initially appear less than perfect, it is important to recognize that all life insurance serves a valuable purpose. Each type of insurance is crafted to meet specific needs or objectives. Term insurance aims to offer short-term financial security if the insured passes away unexpectedly.
Advantages of term life insurance policies include:
Disadvantages of term life insurance include: