Similar in many respects to assessment insurance is yearly renewable term insurance, a plan widely used in connection with group insurance and reinsurance but having only a limited appeal for individuals needing insurance in the later stages of life. An understanding of its nature and limitations is essential for an appreciation of the more complex forms of insurance.

Yearly renewable term insurance is the simplest form of insurance offered by regular life insurance companies. It provides insurance for a period of one year only but permits the policyowner to renew the policy for successive periods of one year each without the necessity of furnishing evidence of insurability. In other words, the policyowner can renew the policy without submitting to a medical examination or providing other evidence of good health. For reasons that will be apparent later, the right to renew is often limited to a specified period or to specified ages. If the insured dies while the policy is in force, the face amount is paid to the designated beneficiaries. If the insured does not die during the period of protection, no benefits are payable at the expiration of the policy or upon the insured�s subsequent death. Instead, the premiums paid to the insurance company are used to pay the claims of those who die during the period of protection. It should not be inferred, however, that the surviving policyowner did not receive any return on the contributions to the company. The protection enjoyed while the insurance was in force had a definite monetary value that was reflected in the premium charged by the insurance company. It will be demonstrated later that the cost of insurance protection for those who do not die is a most important element in the financial operations of a life insurance company.

The premium for yearly renewable term insurance is determined by the death rate for the attained age of the individual involved. This is attributable to the fact that each premium purchases only one year of insurance protection. Moreover, each group of policyowners of a given age is considered to be a separate class for premium purposes; each group must pay its own death claims, the burden borne pro rata by the members of the group. Since the death rate increases with age, the premium for yearly renewable term insurance increases each year.

To illustrate, the female death rate at age 25, according to the 1980 CSO Table, is 1.16 per 1,000. If an insurance company should insure a group of 100,000 women aged 25 for $1,000 each for one year, it could expect 116 death claims, aggregating $116,000. Inasmuch as premiums are paid to the life insurance company in advance, the cost of the anticipated death claims would be distributed pro rata over the 100,000 policyowners, and a premium of $1.16 would be exacted from each policyowner. It should be noted that (1) the premium is precisely the same as the death rate applicable to those insured, and (2) those policyowners who, according to the mortality projection, will die during the year contribute on the same basis as those who will survive. The implication of the latter is that each policyowner pays a share of his or her own death claim, a principle that underlies all life insurance contracts. The proportion, however, varies with the type of contract, age at issue, and duration of the protection. The implications of the former are made clear in the following paragraphs.

If the 99,884 survivors of the original group of 100,000 policyowners should be insured for another year, they would be exposed to the death rate for persons aged 26, or 1.19 per 1,000, which would theoretically produce 119 deaths and claims totaling $119,000. That sum divided equally among the 99,884 participants would yield a share, or premium, of $1.19 per person. If the 99,765 survivors should desire insurance for another year, provision would have to be made for $122,000 in death claims, necessitating a premium of $1.22.

For the first several years, the premium would continue to increase slowly, being only $1.35 at age 30, $1.65 at age 35, and $2.42 at age 40. Thereafter, however, the premium would rise sharply, reaching $3.56 at age 45, $4.96 at 50, $7.09 at 55, $9.47 at 60, and $14.59 at 65. If the insurance should be continued beyond age 65, the cost would soon become prohibitive, soaring to $22.11 per $1,000 at age 70, $38.24 at 75, $65.99 at 80, and $116.10 at 85. The premium at 90 would be $190.75 per $1,000; at 95, $317.32. Finally, if a woman aged 99 should want $1,000 of insurance on the yearly renewable term basis, she would have to pay a premium of $1,000, since the 1980 CSO Table assumes that the limit of life is 100 years and that a person aged 99 will die within the year.

If the surviving members of the aforementioned group should continue to renew their insurance year after year, the steadily increasing premiums would cause many to question the advisability of continuing the insurance. After a point, there would be a tendency for the healthy individuals to give up their protection, while those in poor health would continue to renew their policies, regardless of cost. This is the adverse selection to which reference has previously been made. The withdrawal of the healthy members would accelerate the increase in the death rate among the continuing members and, unless ample margins were provided in the insurance company�s premium rates, could produce death claims in excess of premium income. In this event, the loss would be borne by the company, since the rates at which the policy can be renewed are guaranteed for the entire period of renewability. It is for this reason that companies offering yearly renewable term insurance on an individual basis often place a limit on the period during which the insurance can be renewed.

Even without restrictions on the period during which the insurance can be renewed, yearly renewable term insurance is not usually feasible for long-term protection. Dissatisfaction with increasing premiums causes many policyowners to discontinue their insurance, often at a time when, because of physical condition or other circumstances, they cannot obtain other insurance. They are also likely to resent that after years of premium payments at increasing financial sacrifice, the insurance protection is lost, with no tangible benefits for the sacrifice involved.

More important, however, is the fact that few, if any, individuals are able and willing to continue their insurance into the advanced ages where death is most likely to occur. Yet the great majority of individuals need insurance that can be continued until death, at whatever age it might occur. This need led to the development of level premium insurance.