Why term life premiums jump after the level period ends

A 20-year term policy charges the same amount in year 20 as in year 1, and then, in year 21, the bill can arrive many times larger. That is not a penalty or a trick. It is what happens when a price that was averaged over twenty years stops being averaged and becomes the real cost of insuring an older, self-selected group. This post walks through the pieces: how a level premium is built, why the cost of insurance rises with age, what the departure of healthy policyholders does, and what that means for how you plan.

Start with the cost of covering one year

Imagine an insurer that sells one-year coverage and nothing else. Each year it asks: how likely is it that a person your age dies in the next twelve months, and how much will we pay if that happens? Multiply the probability by the benefit, add the company's expenses and a margin, and you have the year's price. This is the idea behind Annual renewable term (ART) life insurance, and the underlying measure is the mortality rate, the share of people of a given age who die in a year.

Mortality rates rise with age, slowly in a person's thirties and much faster in their fifties, sixties and beyond. So the one-year price rises every year. For a young adult it is a small number, and for a person in their sixties it can be many times the price at 40. That curve is the engine behind everything else in this post.

How a level premium averages the curve

Most buyers do not want a bill that rises every birthday, so insurers offer a level premium term policy. It fixes the price for ten, twenty or thirty years by averaging the cost curve over the whole period. In the early years the customer pays more than that year's true cost of insurance. In the late years the customer pays less. The early surplus is held as a reserve and, in effect, funds the late shortfall.

Here is a simplified, hypothetical illustration. The numbers are invented round figures, ignore interest and expenses, and are not a price.

Suppose the pure cost of insuring a $500,000 policy rises in a straight line from $120 in year 1 to $500 in year 20, by $20 a year.

• Year 1 cost: $120. Year 10 cost: $300. Year 20 cost: $500.
• Total cost over twenty years: 20 years times the average of $120 and $500, which is $310, giving $6,200.
• A level premium that collects $6,200 over 20 years is $310 a year.

Now compare what the customer pays with what the year actually costs:

Add up the overpayments in years 1 through 10 and you get $1,000. Add up the shortfalls in years 11 through 20 and you also get $1,000. The two halves balance exactly, which is what averaging means. A real insurer's math adds interest earned on the reserve, expenses, commissions and taxes, but the shape is the same.

At the end of year 20, the reserve is spent. If the policy simply continued on a level basis, the insurer would have to charge more than $310, because the next year's true cost is already above $500 and the early surplus that once subsidized the late years is gone. The jump comes from the end of the averaging.

Why the real jump is bigger than the simple math

In the example above, year 21's true cost would be about $520, which is roughly 1.7 times the $310 level premium. Real renewals are often steeper than that, and the reason is who remains in the pool.

The Society of Actuaries studied the experience of 25 U.S. companies over 2000 through 2017, in a 2021 report on post-level term. For the most common design, the study found first renewal premiums "as high as 10, 20 or even 30 times" the level premium. It also found that a large share of policyholders lapsed at the end of the level period, anywhere from 27% to 96% depending on the company and design. And it found that those who kept their policies died at a rate well above what the insurers had expected during the level period.

Those three findings fit together.

1. The price jumps. The renewal schedule in the contract is set at the maximum the insurer is allowed to charge.
2. Healthy people leave. A policyholder in good health can apply for a new policy, which at the same age is often much cheaper than renewing. Many buyers who do not need coverage anymore also let it go.
3. Unhealthy people stay. Someone with a new diagnosis may be unable to qualify for new coverage elsewhere, so they stay and pay.
4. The pool gets sicker. The group that remains includes a higher share of people who are more likely to die soon. That is adverse selection, and it shows up in the claims.
5. The insurer prices for the pool it expects. Renewal rates reflect not the average person of that age, but the average person of that age who chose to keep paying a steep price.

Run the loop again with our made-up numbers. Suppose the true annual cost at the start of year 21 is $520 per $500,000, and the people who stay turn out to die at two and a half times the rate the table assumed. Then the pool's true cost is $520 times 2.5, which is $1,300. Against the $310 the customer had been paying, that is a factor of more than four. Real companies can show larger factors than this because the original level premium is built for a younger, healthier group and mortality at older ages rises steeply; the example is meant to show the mechanism, not the size.

The role of lapse assumptions

Insurers set the level premium on assumptions about how many policyholders will keep paying. If more policies lapse than expected before the end, the insurer keeps premiums it priced for a longer relationship. That is the idea behind lapse-supported pricing: some of the price of a long-term product depends on people dropping out. In term insurance the question is subtler, because lapses in the early years help the insurer, while lapses at the end of the level period, particularly among healthy people, hurt the quality of the remaining pool.

The industry term for how many people keep their policies is persistency. Low persistency at the end of the level period is exactly what drives the rate on renewal higher, because the people who leave are the ones the insurer wanted to keep. Buyers cannot control any of this, but they can read it: a very steep post-level schedule is a sign that the insurer expects only people with few other options to stay.

Why the schedule is printed in the contract

When you buy the policy, the contract includes a table of guaranteed maximum renewal premiums by age or by policy year. Insurers must be able to charge no more than those guarantees, and the table is usually printed in the policy or on its schedule pages. It is often not the focus of the sales conversation. It should be.

Look for these in your own contract:

• When does the level period end? The date, not the nominal term name. Some policies end the level period before the stated term ends.
• What does year 21 cost? Ask for the guaranteed rate and the current rate, if different.
• Is it a graded step-up? Some designs raise the premium over several years instead of all at once. The SOA study reported a lapse range of 31% to 80% for graded designs, compared with 27% to 96% for the most common design, so a gentler step does not remove the pattern.
• Is the policy guaranteed renewable, and to what age? guaranteed renewable means the insurer cannot refuse to continue the coverage if you keep paying. The maximum age is stated in the contract.
• What is the conversion deadline? It often falls before the level period ends. See converting term life to permanent: how the conversion option works.

Other designs behave differently

Not every term policy follows the plain pattern, and the differences are worth knowing before you compare quotes.

• Annual renewable term never averages. The premium starts low and rises each year, so there is no cliff, only a slope. It is the cheapest way to hold coverage for one or two years and the most expensive way to hold it for decades.
• Graded step-ups spread the increase over several years. The total you pay over the transition can still be large, but the first bill is less of a shock.
• Return of premium term charges a much higher level premium and refunds it if you outlive the term. After the level period, the same renewal logic applies, and the refund is only paid at the end of the level period if the policy is still in force. See the guide on return of premium term life insurance: is it worth it.
• Post-level term that is not renewable simply ends. Some policies offer no renewal at all, or end renewal at a stated age, so the cliff is not a price but a stop.

The mechanism is the same in every case: the policy is a promise about a time period, and the price outside that period is a different calculation. Ask which design you are buying, and ask what the contract says about year 21.

What this means when you shop

The jump is a reason to buy the term you need, not a reason to avoid term. A few practical points follow.

Pick the term to match the need. Buyers sometimes choose the shortest cheapest term and then discover they still need coverage when it ends. A policy that runs through the years when others rely on your income spares you the renewal rate altogether. If the need is uncertain, compare a longer term against the shorter one. The guide on how life insurance premiums are calculated explains how term length and age feed the price.

Treat the renewal schedule as a backstop, not a plan. If you expect to need coverage after the level period, the sensible plans are a new, smaller policy bought while you are still healthy, a partial conversion, or a ladder of terms of different lengths. Renewal is useful for a short bridge or for someone who cannot qualify anywhere else.

Know that the premium is not the whole price. A 20-year policy at a low monthly premium and a 30-year policy at a higher one are different products. Compare the total you would pay over the period you expect to need coverage.

Plan the last two years early. The renewing term life insurance after the level period ends guide has a step-by-step approach, and the what happens when your term life policy expires guide explains what happens if you do nothing. Two related blog posts, planning in year 15 of a 20-year term: your options map and ten years before your term ends: a countdown plan, put the same reasoning on a calendar.

A short worked comparison

This is hypothetical. A 50-year-old holds a $250,000 term policy whose level period ends this year. The level premium has been $90 a month. The contract's first renewal year is $400 a month and each later year is higher. The policyholder is healthy and still needs coverage for eight more years while a daughter finishes professional school.

• Renewing for eight years, assuming the premium averages $600 a month over the period: 8 years times 12 months times $600 equals $57,600.
• A new eight-year term policy for the same amount, at an illustrative $150 a month: 8 times 12 times $150 equals $14,400.
• The difference in this illustration is $43,200.

Even if the new policy's price turns out to be double that illustrative figure, the difference remains large. If a health problem has arisen, the comparison changes: the new policy might be unavailable or rated, and renewal may be the best option. The point is to check before the old policy ends, because once it is gone, so is the choice. The odds of outliving your term can give a sense of the odds of dying within a chosen number of years, though it is general information and not a forecast for any one person.

Common misunderstandings

• "The insurer raised my rate." In most cases it did not. The schedule was in the contract from the beginning. What changed is that the averaging ended.
• "The jump means the policy was a bad deal." Not necessarily. A level premium is a prepayment of future costs. If you outgrow the need before the end, you may have paid less than year-by-year pricing would have cost, or more, depending on the years you held it.
• "I can always renew cheaply." Renewal is guaranteed in availability, not in price.
• "A healthy person should stay put." A healthy person is usually the one most able to leave, and the one for whom a new policy is cheapest.

Key takeaways

• A level premium averages a rising cost curve: you overpay early so that you underpay late, and when the averaging ends the true annual cost takes over.
• Healthy policyholders tend to leave at the end of the level period, which makes the remaining pool less healthy and pushes renewal prices higher still.
• The Society of Actuaries found first renewal premiums as high as 10, 20 or even 30 times the level premium in the most common design, across 25 companies from 2000 to 2017.
• The schedule of renewal rates is in your contract; read it, and the conversion deadline, before you buy and again two years before the level period ends.
• If you still need coverage when the level period ends, compare a smaller new policy, a conversion and a ladder against renewal before the old policy expires.