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30 year term

Renewable Term Life Insurance – Part III (A warning)

by Glenn on June 27, 2008

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.

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Renewable Term Life Insurance – Part II

by Glenn on June 27, 2008

In my previous post I discussed how term policies in Canada are technically renewable but the higher renewal premiums mean that for most of us the policy won’t be renewed. Let’s look at what our options actually are upon hitting the first renewal period for your term life insurance policy.

  1. You’re healthy and still need the insurance. Well, that’s simple enough – shop out the life insurance (you can use the quoting system on the right side of this page), take a new medical exam and buy a new policy from whatever company is currently offering inexpensive prices.
  2. You’re healthy and don’t need the insurance. Well, I guess you might want to drop the insurance. If there’s no current or future need for insurance, no need to pay for it. In my experience though, this is rarely if ever the case.
  3. You’re unhealthy. If that’s the case, even if you don’t immediately need the insurance you probably still want to keep it. If you know you’ll either never get life insurance again or only at greatly increased premiums, then hanging on to your existing policy is probably a good idea achat cialis generique. But that leaves you with the prospect of those horribly high renewal premiums – the ‘ultimate’ rate tables. Yikes! But there’s a solution that will allow you to go back to the ‘select’ rate table without taking a medical exam. This is called the conversion priviledge and I’ll discuss it in detail in a future post. Most but not all companies in Canada offer this conversion priviledge at no cost. I recommend you only ever purchase a term policy that has this conversion priviledge.

Now this might seem that the thing to do is to buy a term policy then take a new medical every few years. In fact, that’s not the proper approach. The problem with this approach is that you are assuming the risk of being able to take a new medical exam in the future. Instead, make sure you buy the proper length of term insurance. If you need insurance for 20 years, buy 20 year term instead of 10 year term twice, with a medical exam in year 11.

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Renewable Term Life Insurance – Part I

by Glenn on June 27, 2008

Most (but not all) term life insurance policies offered in Canada are known as Renewable and Convertible Term. In this post I’m going to address the ‘renewable’ part of the product description.

Term policies have a period during which the premiums are level and guaranteed not to increase. 10 year term life insurance has premiums that are level for 10 years. 20 year term life insurance has premiums level for 20 years, and so on. The renewable part refers to what happens at the end of that level term.

Quite simply, a renewable term policy means that at the end of the initial level term period the policy does not automatically expire. The premiums will increase but as long as you continue to pay these premiums the policy will continue to be in force. In other words, the policy is automatically renwable as long as you continue to pay the increasing premiums. Generally level term products tend to renew for the same duration as the initial level period. 10 year term, in year 11 has a drastic price increase, but that new higher premium will remain level for another 10 years (years 11-20), then the premiums go up again and are level for another 10 years and so on. This pattern continues to until the expiry date of the term policy – somewhere between the ages of 70 and 80 for most term policies in Canada.

Let me go off on a tangent here for a sec as I lay the groundwork for something else that’s important with the renewable part of term policies. Actuaries (the statisticians that price life insurance) have two sets of rate tables they use for pricing. These two tables are called ‘Select’ and ‘Ultimate’. The select tables contain the mortality rates and prices for those people who have just completed a medical exam and proven their insurability. They would naturally get better rates than the general population (since we know they’re healthy). The ultimate tables reflect people who haven’t taken a medical exam lately. We don’t really know their health.

The premiums for the first 10 years of a 10 year term policy would be priced using the lower select rates since you’ve just taken a medical. The renewal premiums in year 11 and onwards would be priced using the higher, ultimate rate tables since at renewal it’s been 10 years since you proved your insurability and the insurance company no longer knows for sure if you’re healthy or not.

So – initial premiums, cheaper and priced using the select table. Future renewal premiums are priced using the more expensive ultimate tables. As a result, renewal premiums tend to be very expensive. And that means most people want to drop their policy at the first renewal and requalify (take a new medical) for a new policy so that they move back to the less expensive select rates. In fact, the renewal premiums on term policies tend to be so expensive that you’d be nuts to continue with the policy if you’re able to take a new medical exam. So while term insurance is technically ‘renewable’, in effect the high renewal premiums mean few people (only those unhealthy and thus unable to take a new medical) would renew their term policy.

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