Understanding Life Insurance Terms

Annual renewable term life insurance is automatically renewable each year up to a specific age limit (usually 65 but sometimes older). Since the chances of your dying increase statistically the older you get, your premiums go up each year as you renew. If you buy your policy when you are young and unlikely to die, you can obtain substantial coverage for an inexpensive premium.

Renewable term life insurance automatically allows you to renew your coverage after the term of the policy is over (generally 5 to 20 years), even if your health has deteriorated. This is similar to annual renewable term life insurance, but for a longer period of time. Since a lot can happen to your health in 5 or 20 years, renewability can be a valuable feature. But since it involves a greater financial risk for the carrier, renewable term coverage generally costs more than annual renewable policies. The conditions associated with renewable term may differ from company to company. For example, though you are guaranteed the right to renew at the end of your term, you may or may not be able to renew for the same amount of coverage or for the same term. Your premiums will almost definitely go up upon renewal.

Level term life insurance guarantees your premium will stay the same each year for the term of your policy, generally 5 to 20 years. Insurance companies keep your premiums the same by charging you an average of the premiums they would ordinarily charge you with an annual renewable policy. Therefore, you will probably pay more in the early years and less in the later years than you would if you had an annual renewable policy. You will probably also encounter a big increase in premiums at the end of your term when you apply for a new insurance policy. The big advantage of level term is that your premiums stay the same throughout your policy, even as you get older. However, if for some reason you change policies in the early years, when your level term policy is most expensive, you will end up paying more than you need to for coverage.

Decreasing term life insurance features a decrease in your cash benefits each year while your premiums remain level for the duration of the term. Decreasing term is typically used for mortgage payment protection insurance or to cover other items whose costs decrease over time. It isn’t a wise choice for your general life insurance needs, which due to the effects of inflation, tend to increase over time.

Convertible term life insurance enables you to convert your term insurance into any of the other types of insurance policies offered by the issuing insurance company. Convertibility can be an advantage if your insurance needs change over time, as they are likely to do. And, since it involves greater risk for the insurance company, it generally costs more than annual renewable.