I was at a cocktail party last weekend and a friend told me he had a great rate on his term life insurance that he bought 8 years ago. He was asking me what his options were and while I explained his options I wanted to make sure he understood the risk, because after all, that's what insurance is about, managing risk.

Many term life insurance policies are renewable and convertible. Renewable means that after the initial term period, 10 or 20 year that the policy will renew at an increased premium that is contractually guaranteed by the insurance company.  If you buy a 10 year term the premium is fixed for 10 years and in year 11 the premium increases, it increases again in year 21 and 31 until the coverage ceases, usually at age 85. These rates are guaranteed regardless of the person’s health. Convertible means that the insured can change the term life insurance policy to a level premium whole life or permanent policy without providing evidence of good health.

My friend said that he is excellent health and that he needs life insurance protection and wants to pay as little as possible for term life insurance protection.

Let’s assume he bought $250,000 of 10 year term life insurance at age 45 for which he pays $29.25 per month. After the 10 years are over he can expect to pay $189 per month if he keeps his existing contract.

His option is to wait 2 more years until his renewal date and then apply for new coverage with the same insurance company or another insurance company offering competitive rates. If his health remains excellent he could expect to pay $73.13 per month rather than the guaranteed rate offered by his existing coverage of $189 per month.

The risk is that his health changes in the next two years and that insurance at standard rates is no longer available to him. His other option is to apply today for the coverage at age 53 while he is in excellent health and pay $59.63 per month for $250,000

Assuming you need the insurance protection, what would you do?

a)     Take my chances and wait for 2 years to apply for a new policy

b)     Apply today for the policy knowing I am in excellent health