Should You Renew Your Life Insurance Policy?

For most people, term life insurance is the most effective way to secure their family’s future. Term life insurance ensures your loved ones will be able to live comfortably even after you are gone. (If you ever wondered why you should purchase life insurance, now you know.)

There are two main types of life insurance: term life and permanent life also known as whole life. Permanent life is usually far more expensive than term life, and is suitable only in a few specific situations.

Why is that so? What are the benefits of term life insurance?

Term life insurance is the simplest, cheapest, and easiest way to protect your loved ones from life’s what-ifs. With term life insurance you enjoy coverage for how long you need it and do not have to pay for added extras that increase your insurance cost, such as the cash value component.

Furthermore, nearly all term life insurance policies come with a feature called “guaranteed renewable.”  This means you have a right to renew your life insurance policy at a pre-defined rate before its term expires. And the best part is you do not need to submit proof of insurability to get approval. You qualify automatically. The insurance company cannot turn down your request for life insurance renewal, even if your health is not what it used to be.

Here is an example that explains the guaranteed renewable feature in more detail.

Let’s say you buy a 10-year term life insurance policy. The policy will list your monthly or annual premium rate over the next 10 years. It will also specify the premium rate that you will have to pay should you renew the policy after every 10-year period. You get to renew your existing policy at guaranteed rates even if your health has deteriorated significantly since you first took out the policy. That is splendid, right?

For sure, the guaranteed renewable feature is beneficial in certain situations — but there is a catch. You will have to pay a significant amount to renew the policy.

Why are life insurance rates so high?

Life insurance companies are in the business to make a profit. They will never offer a deal that is not more profitable for them, than it is for you — and the guaranteed renewable feature is no exception.

An insurance company will set the pre-specified life insurance renewal rates absurdly high, essentially stating, “You are free to renew the coverage without a medical exam. But since we will not have any data to check your health, we will just go ahead and assume you will have health issues in the coming 10 years. Consequently, your renewal premium rate will be similar to what someone in poor health will pay for a new policy.”

As a matter of fact, the life insurance renewal premium rates for a 10-year term policy can be as high as five to 20 times the initial rate! So, there you have it — the changes to premiums that occur when you renew a policy.

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How to assess whether to renew your life insurance policy?

So, it is settled. Life insurance renewal premium rates are usually exorbitantly high. Which begs the question – Should you renew your term life policy?

It depends on your health. Unless you have a health condition — such as cancer — that makes you uninsurable, you are likely to find a new term life policy more affordable. Here is the low-down on how to smartly assess whether to renew your term life insurance policy.

Step 1 – Be mindful of the term expiry date

Remember, you can only renew your life policy before its term expires. Therefore, make sure you know when that is going to happen. You can find the expiry date listed on the first page of your policy. Next, set a reminder about 4-5 months before the expiry date to tackle the next step in the list.

Step 2 – Understand your new life insurance needs

Insurance needs are not set in stone. If your 20-year term life insurance policy is approaching its term, chances are you might not need as much coverage as you did two decades back. Your kids may have become self-sufficient, your mortgage may have been paid off, and your assets may have grown. So, assess your personal and financial situation to understand how much coverage you need and for how long (if you need one at all).

Step 3 – Get quotes from multiple insurers

Once you know your insurance needs, it is time to do some work. Apply for a new policy with multiple insurers (at least 4-5) and compare their quotes. Since most Canadian insurers provide online quotes, comparison shopping is not likely to take more than an hour but may save you a few hundred dollars.

Step 4 – Ensure your policy is not renewed automatically

Term life policies renew automatically at the conclusion of their term. So, if you have a 15-year term life plan, the policy automatically renews at the end of that period — but at a far higher rate than the initial premium.

If you forget to inform the insurance company of your wish to cancel the policy in time, they will be more than happy to press the automatic life insurance renewal button. After all, that is to their advantage, allowing them to collect more premiums from you. What could be better than that for them?

So, the onus is on you to inform the insurance carrier that you do not want to renew the policy. If you do not, you will be in for a shock when the next statement comes through the door.

What happens when your term life insurance policy expires?

A term life insurance policy expires when it completes its term. If your policy is approaching the end of its term, you have three or four options (depending on your policy) in front of you.

• Cancel the existing policy (That is, simply let it complete its term and expire)
• Renew it
• Get a new policy
• Convert your term life policy into permanent coverage. (Some term life policies allow policy owners to convert the policy into a permanent one up to a certain age. You will not have to undergo a medical exam. This particular option may make sense for those who now want lifelong coverage.)

Do you have to take a medical exam if you decide to renew your term life policy?

No, you do not. You do not need to submit proof of insurability to renew your policy. On the downside, you will pay a much higher premium rate than before for the new term.

Should you ever renew a term life insurance policy?

Most people would be better off buying a new policy than renewing the existing one, owing to astronomically high renewal rates. But there is one situation when renewing an existing term life insurance policy makes a lot of sense — that is, when your health has deteriorated significantly since you took out the policy.

If you apply for a new policy, the insurance company may reject your application or quote a rate that is even higher than your life insurance renewal premium. In either scenario, you will be better off continuing your existing coverage.

Do you have to take new coverage from your existing insurance provider?

No, you do not. You can get new insurance from any Canadian insurance company you want.

If another insurance company is offering you a better rate than your provider, go ahead and sign-up with them. But if your existing insurance company has got the best offer in the town, you may well want to stick with them.

What if you do not want to renew your life insurance policy or take out new coverage?

Well, it is a free country, and you are not bound by law to carry life insurance. That said, just make sure you know what you are doing.

Life insurance, while important, is not necessary all the time. Here are some situations when you might not need it.

• You are financially independent
• Your spouse is not financially dependent on you and has accumulated enough assets to independently take care of themselves
• Your children are self-sufficient adults

If you decide you no longer need insurance, do not forget to inform your provider about the same before the current term expires. Otherwise, your policy may well be renewed automatically.

Assessing your life insurance needs

If someone depends on you financially — a spouse, kid, or parent — you probably need insurance. Life insurance cannot replace you, but it can ensure your loved ones do not suffer financial hardship after you are gone.

So, what does life insurance cover?

In the event of your death, the insurance company pays the death benefit amount to your beneficiaries. They are free to spend the funds however they like. Beneficiaries usually use the payout to cover:

• Everyday expenses: Such as groceries, monthly bills, etc.
• Dependent or child-care costs: Like daycare costs
• Outstanding debts: This may include a home loan, auto loan, credit card debt, or private student loan
• End-of-Life expenses: Like end-of-life medical care or funeral or burial expenses

Once you have decided that you need insurance, you must figure out:

• Which type of life insurance policy do you need — term or permanent?
• How much coverage do you need?

Term or Permanent life

Term life provides coverage for a fixed period. As such it works best with financial needs that have an end date. In other words, you may want to opt for term life if you need coverage until:

• You retire
• Your children become self-sufficient
• You pay off your mortgage and other debts
• You reach some other milestone

Term life insurance is also a great choice for budget buyers. Since it is five to 10 times cheaper than a comparable permanent life policy, it offers you more value for money. That is, you can get more coverage with it as opposed to permanent life.

Permanent life, on the other hand, has no end date. It provides coverage for your entire life. Consequently, it is more suitable for some with financial needs that do not have an end date.

Do you have a lifelong dependent? Do you wish to leave a financial legacy? Do you want to protect your estate? If yes, you would be better off with a permanent life policy.

In addition, many permanent life policies include a savings account, called “cash value.” The policy’s cash value grows over time and is available to you while you are alive. You can borrow or take a loan against it any time you want. The cash-value feature makes permanent life a good option for wealthy people who have maxed out other investment vehicles.

How much insurance do you need?

You need enough coverage to take care of your outstanding debts and cover your financial obligations, which usually is 10-12 times your annual income.  

Conclusion

Most term life policies include the guaranteed renewable feature by default. If your policy also has it, you can renew it without proving insurability. However, renewal rates are generally very expensive, and there is a good chance your insurance needs have changed over time.

For these reasons, a new life insurance policy may make more sense for you. At Dundas Life, we work with the top Canadian Life Insurers and can help you find the right coverage at the best price.