Yearly Renewable Term Insurance

Why Premiums Increase Each Year

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The yearly renewable term insurance policy, sometimes referred to as the increasing premium term insurance policy, needs some explanation. I think of this policy as a pressure policy if you intend to keep it for more than one year. Here is why I feel this way. When you buy the yearly renewable term insurance policy the premium you are quoted is for you at the given year that you request the quote. At this same time next year you will pay a premium for a person in your same exact situation but one year older. The following year the premium increases again as you will be paying a premium for a person two years older. On and on it goes...



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Why the constant premium increase. The fact is when you buy a yearly renewable term insurance policy you are buying a one year term policy. There is no extra premium load in this policy. You are paying the premium that anyone in the type of health situation would pay. Let me explain...

All life insurance companies employ actuaries who take into consideration all possible variables and have the ability to calculate very accurately how many people at a given age, say age 25, will die in a particular year. Because they know this they can spread the risk and charge a premium accordingly. The yearly renewable term policy is pure insurance with no loads; thus the additional premium the following year. Let us compare that with a 5 year term policy...

With the 5 year level term policy the premium is loaded up front. The actuaries have calculated the premiums for 5 years and spread the risk cost over that period...thus a level premium.

I don't usually recommend this policy as people tend to forget what the policy is all about and when they see the premium increase they get scared and attempt to cancel the policy. That is why I look at the yearly renewable term insurance policy as a pressure policy. I recommend a 5 year level term policy or a 10 year level term policy for people who are strapped for cash...instead of a yearly renewable term insurance policy.



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