3.2.1 Term Life Premiums
Term life policies can be renewed when they reach their expiration date; however, the mortality rate (cost of dying) and the risk factor have both risen. That means that the policy's face value will remain the same, but the new premium will be higher each time the policy is renewed. Because the premium "steps up" (or rises), this method is called the step rate method.
Level term premium insurance policies bypass the step rate method. Remember, in all term policies when the option to renew is exercised, the premium goes up accordingly - all except level term premium policies.
Sounds good to be able to renew your policy when you reach 50 years of age at the same cost as when you were 40, doesn't it? There's almost always a catch, isn't there?
Insurers are well aware that as the insured ages, so does the insurer's risk. So in order to keep the premiums level, they must charge more in the beginning.
In Jim and Faye's case, when they purchased the term policy on Jim, he was 25 years old and now he is 30. If the new whole life premium is based on the original age method (25), the premiums would naturally be lower than if they were based on the attained age method (30). However, they may have to pay the difference in premiums between the term and permanent insurance amount from the date they purchased the term policy to the time of conversion. By paying the difference, they benefit from having a lower premium payment and accumulating the cash value quicker in the new policy than if the conversion was made using the attained age method.
