What it means
A term life insurance policy pays out a set sum if the insured person dies within a fixed period, such as 10 or 20 years. When the period ends, the cover simply stops unless the person arranges something new.
A renewable term policy includes a right to continue for another term without proving good health again. This right is valuable because health can change.
A person who develops a serious condition during the first term might find it hard or very expensive to buy new cover elsewhere. The renewal option protects them from that risk, and the insurer cannot refuse to renew on health grounds.
The cost of this protection is that the premium usually steps up at every renewal. Insurers base the new price on the insured person's current age, not on their health when they first bought the policy.
Premiums for a person in their fifties can be several times higher than in their thirties, which is why many people stop renewing at some point. Renewable term is commonly used by families covering a mortgage or young children, and by businesses covering key people.
Finance teams use it to plan the cost of protecting a loan, a partnership or an important employee. A related product, convertible term, adds a right to switch to a permanent policy, which is a different feature.
Because renewal is often available only up to a certain age, buyers should read the maximum renewal age and the premium schedule. A policy that is cheap in the first term but very expensive in the later ones may be poor value over a long horizon.
Comparing the total premiums over the whole period you expect to need cover gives a better picture than the first-year price alone.
In practice
Real-world examples.
Example
A 35-year-old father takes out a 10-year renewable term policy to cover his mortgage. After seven years he is diagnosed with a heart condition, but he can still renew without a medical exam when the term ends. His family stays protected for the remaining mortgage period.
Example
A small architecture practice buys renewable term life insurance on its founding partner, and the premiums are paid by the business. At each renewal the practice reviews the cover amount against the size of its bank loans. The finance manager records the premiums as an operating cost and plans for the step-up in price.
Example
A couple in their fifties finds that the premium for renewing their policy has doubled. They compare it with the cost of a new policy for healthy people of the same age, and decide to renew only part of the cover. This reduces the cost while keeping a reasonable level of protection.
Formula
Calculation
Total cost of cover = Sum of premiums across all terms
Cost per $1,000 of cover per year = Annual premium / (Cover amount / 1,000)
Suppose a 40-year-old buys a 10-year renewable term policy with $500,000 of cover for $400 a year. Cost per $1,000 of cover = 400 / 500 = $0.80 a year. At renewal at age 50, the premium rises to $800 a year. Total premiums over the first two terms = (400 x 10) + (800 x 10) = 4,000 + 8,000 = $12,000 for 20 years of cover.Case study
Seen in the real world.
Willowbrook Consulting is an illustrative, fictional firm with three partners, each insured for $1,000,000 under a 10-year renewable term policy. The policies protect the firm's bank loan and provide funds to buy out a partner's share in the event of a death.
At the first renewal, one partner had developed a chronic illness. Because the policy was renewable, the insurer could not decline him, although the premium rose with his age to $3,200 from $1,500 a year.
The firm's finance director added the higher cost to the budget and compared it with the risk of losing the buyout funding. The illustrative lesson was that the renewal right is most valuable exactly when it is least likely to be affordable elsewhere.
Watch out
Common mistakes.
- Assuming the premium stays the same at renewal, when it usually rises to reflect the insured person's older age.
- Confusing renewable term with convertible term, which allows a switch to permanent cover rather than a continuation of term cover.
- Overlooking the maximum renewal age, after which the insurer may stop offering further terms.
Questions
People also ask.
Do I need a medical exam to renew?
No, that is the main feature of renewable term, as the insurer cannot ask for new evidence of health at renewal.
Why does the premium go up at renewal?
The insurer prices the new term based on your current age, and the risk of death rises with age, so the cost of cover increases.
Is renewable term cheaper than level term?
The first-term price can be similar, but over a long period the total cost of renewing is often higher than a single longer level term policy.
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