South Carolina Life Insurance Practice Exam

In an annually renewable term life policy, what happens to the premium?

1. The premium is paid in a lump sum

2. The premium increases with each renewal

3. The premium remains constant

4. The premium is refund after a set period

The correct answer is: The premium increases with each renewal

In an annually renewable term life policy, the premium is designed to increase with each renewal. This increase typically reflects the policyholder's advancing age and the associated higher risk for the insurance company. As the insured grows older, the probability of mortality increases, leading insurers to adjust premiums to account for this risk. Renewable term life insurance provides flexibility in terms of keeping the policy active without needing to undergo a medical underwriting process at each renewal. However, the downside is that as the policy renews annually, policyholders will notice an increase in their premiums, making it essential for individuals to plan accordingly for this rising cost over the duration of the policy. This dynamic of increasing premiums is a fundamental characteristic of such policies, distinguishing them from other life insurance types with fixed premiums.