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term life insurance canada

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.