Renewable Term Life Insurance
A popular type of life insurance is renewable term life. This policy is a temporary form of life insurance that lasts anywhere from 1-30 years and features either level or increasing premiums. The size of premiums depends on factors such as age, health, desired coverage amount, and choice of optional riders. The unique advantage of renewable term life over non-renewable policies is that you can extend the duration of the contact after it expires without incurring additional charges or having to pass a new medical exam.
Renewable Term Life Example
In his late 30's, John decides to buy a term life policy. With a 5-year-old child and spouse to support, John figures he will need 15 years of income coverage. He settles on renewable term life because he and his wife are thinking of having one or two more children, and John wants the option to prolong the policy for another 5-10 years until his youngest graduates. John also have a developing medical condition that might put him at risk of not being able to pass the medical exam in 15 years time. In this scenario John is wise to pay a bit extra for the flexibility of renewable term.
Differences Between Renewable Term Life and Other Types
The ability to renew your life insurance policy is a great flexibility to have. Otherwise, the contract might expire with the policyholder desiring further coverage. In the case of non-renewable term life, the insured who have to take out another policy, which means passing a new medical and renegotiating rates. There is risk that the policyholder won't qualify for insurance at a later age, or will be forced to pay substantially higher rates. Although the renewal option comes at the cost of greater premiums, it is often worth while to pay extra for the flexibility it offers.
Who Should Buy Renewable Term Life?
Renewable term insurance is most appropriate when you know you need temporary coverage, but aren't 100% certain how long the term should be. Renewable level term is the safest bet, but if you want the lowest possible rates, consider whether relinquishing flexibility is worth while. Depending on your financial situation and plans for family growth, the ability to renew at little or no cost is worth the cost.
Alternatives to Renewable Term Life Insurance
A good alternative to renewable term is return of premium insurance or permanent life insurance. If you are worried about not being able to qualify in later years, a permanent policy like whole life will eliminate the risk of lapsing coverage. If you are worried about increased rates, ROP term life is a good alternative because the premiums paid back after it expires can be used to fund a new policy. Similarly convertible term life is a good option, allow you to trade in the temporary policy for a permanent one, like whole life.
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