Renewable Term Life Insurance - Part III (A warning)

In the first post on this topic I mentioned how the first level period of a term insurance policy is priced using the cheaper ’select’ table. Future renewals are then priced using the much more expensive ‘ultimate’ rates table. The underlying difference is that the select table rates are for people who have just taken a medical and proven their health. After 10 or 20 years without a medical exam the average health of insureds starts to look like the general population - the insurance company no longer knows if you’re still healthy and prices accordingly.

HOWEVER! It didn’t use to be this way. Older term policies purchased in Canada prior to the mid 90’s or so were far, far better. If you have a term policy prom that period or prior, you should think long and hard before you cancel it for a newer policy. These older policies were far superior than current policies.

The difference was the renewal premiums. Older term policies used the ’select’ rate tables for the first level premium period…and for future renewals. That’s right, at renewal you would receive the same rates as someone who’s just taken a medical exam, but without taking a medical exam.

For example, a 30 year old who bought a 10 year term policy would initially receive select rates. Upon renewal at age 40, their new, higher rates would be based on someone 40 years old who had just taken a medical exam and proven their health - they would receive ’select’ rates for a 40 year old (and all of this would normally be fully guaranteed until the policy expires). Contrast that with a current term policy where the premiums at age 40 skyrocket since the insurance companies assume you’ve not taken an exam and are potentially unhealthy. In other words, the old policies have pricing similiar to current policies assuming you take a medical exam every 10 years - without having to take the medical exam.

Unfortunately in the 90’s a few American insurance companies entered into the Canadian marketplace. They brought with them lower pricing on the initial premiums, but at the expense of a number of things Canadians were used to in their term policies. Moving from only using the select rates for initial and renewal premiums to only using select rates for the initial premium and ultimate rates for renewal premiums was one of the sacrifices to policies that Canadian insurance companies had to make to remain competitive on the initial premiums.

In summary, if you have a term policy from the mid 90’s or prior, make sure you don’t have one of these older style policies before letting it lapse or cancelling it. You won’t be able to buy a policy with renewal premiums like that again.