What it means
Term life insurance pays a fixed sum if the insured person dies during the policy period. With a yearly renewable policy, the period is only one year, and the insurer agrees in advance to renew it each year, up to a stated age.
The insured does not have to prove good health again, which is a valuable guarantee for someone whose health may change. The price is the catch.
The premium is set each year using a rate that increases with age, so the cost starts low and climbs steadily. Over a long period the total cost can far exceed that of a level-premium policy, where the premium is fixed for a longer term.
YRT suits particular needs. Short-term cover, such as protection during a project or a loan, can be cheaper than longer policies, and group schemes use it because the age mix of the group is monitored each year.
Insurers also use YRT reinsurance to transfer mortality risk without transferring the investment side of a policy. For a finance professional, the main points are cost forecasting and budgeting.
A company paying for key person cover on a yearly renewable basis should budget for rising premiums, and may review whether a level policy would cost less over the expected life of the need. A switch is easier early on, before premiums climb and before health changes.
Premiums are normally quoted as a rate per $1,000 of cover, and the rate table is part of the policy. The insurer can usually change rates only within the maximum table stated in the contract.
Reading that table shows the worst case rather than the first-year price. Reinsurance gives YRT a second life.
An insurer that writes a large policy can pass part of the risk to a reinsurer and pay it a yearly premium that follows the amount still at risk. As the insurer builds up reserves on the policy, the amount at risk falls, and so does the reinsurance premium.
In practice
Real-world examples.
Example
A start-up takes out yearly renewable cover on its founder to satisfy an investor. The premium is low in the early years, which suits the company's tight cash. The finance director plans to review the cover when the company is more established.
Example
A life insurer cedes part of its group scheme risk to a reinsurer on a YRT basis. The reinsurer charges an annual premium per $1,000 of risk transferred, and the insurer retains the investment side. The arrangement reduces the insurer's exposure to a few large claims.
Example
A professional with a fluctuating income buys a yearly renewable policy to cover a three-year loan. The premium is lower than a level policy for the first two years. She cancels it once the loan is repaid, which is easy because there is no long-term commitment. The flexibility is the main reason she chose it.
Formula
Calculation
Annual premium = (cover amount / 1,000) x rate per $1,000
Suppose a company buys $500,000 of YRT cover on a key manager aged 40, with a rate of $1.20 per $1,000 at age 40 and $1.32 at age 41. Premium at 40 = 500,000 / 1,000 x 1.20 = 500 x 1.20 = $600. Premium at 41 = 500 x 1.32 = $660. The increase is 660 - 600 = $60, which is 60 / 600 x 100 = 10% in one year.Case study
Seen in the real world.
Harbour & Pike Engineering is an illustrative, fictional firm that insured its two founders on a yearly renewable basis for $1,000,000 each. In the first year the combined premium was $2,400, and the finance manager budgeted a small amount for it.
By the tenth year, premiums had risen to $9,600 as the founders aged, and the cost was no longer trivial. The finance manager asked a broker to compare the policy with a 20-year level term policy.
The level policy would have cost slightly more in early years but far less later on. The broker also pointed out that the founders' health had been good, so a medical check for a new level policy was likely to be passed. Waiting longer would have made that switch harder and more expensive. The illustrative lesson is that a low first-year premium says little about the lifetime cost.
Watch out
Common mistakes.
- Judging YRT by its first-year premium, when the cost rises each year with the age of the insured.
- Assuming the policy stays cheap indefinitely, when renewal is guaranteed but the price is not fixed.
- Confusing YRT with a level term policy, which holds the premium steady for a longer period.
Questions
People also ask.
What does yearly renewable term mean?
It means life cover for one year at a time, renewable each year without further medical checks.
Why does the premium go up every year?
The probability of death rises with age, so the insurer charges more to cover the higher risk.
Where is YRT used most often?
It is common in group insurance and in reinsurance arrangements, where flexibility and risk transfer matter more than a fixed price.
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