Fixed or Renewable – Which is the better term insurance?

Term insurance and its intended purpose

A type of life insurance, term insurance is typically purchased for temporary protection and is used to cover a protection gap up to retirement age. With upfront premiums for term being lower than other types of life insurance, term plans can be seen as the affordable option for life insurance.

There are generally two types of term insurance:

1. Fixed term
2. Renewable term

In this article, we elaborate on the differences between the two types of term insurance and highlight when a fixed term insurance may be suitable for you.

#1 Period of insurance

One main difference between the two types of term insurance is the period for which you are insured for.

Fixed term plans provide coverage for a specified period of time. This can be for a fixed period of up to 40 years or up to a specific age (e.g. up to age 55, 60, 65, 70, 75, 80 or 85).

Renewable term plans on the other hand will only provide coverage for a short period of time. This coverage period range from just a 1 year of coverage or up to a 10 year coverage. However, you may renew these plans should you wish to continue enjoying coverage beyond the specified coverage period. Such renewals are guaranteed insurability and you will not be subjected to further health declarations or tests for these renewals.

(See "Reduce Your Insurance Expenses With These 4 Tips")

#2 Upfront premiums

Another difference between the two types of term insurance is the upfront premiums required. In the table below, we can see that the upfront cost of a renewable term plan tend to be lower than that of a fixed term plan. This is because fixed term plans offers coverage for a longer period and therefore there is certainty in knowing how much premiums you are expected to pay for your entire coverage period.

However, as renewable term plans only covers for a short term (e.g. one to ten years), there are lower risks involved and as a result, lower premiums.

^{Profile: Age 30, non-smoker male for death and total permanent disability (TPD) coverage. Accurate as of 12 April 2021.}

Consider fixed term insurance if you want premium certainty

Fixed term plans provide coverage for a specified period of time with level premiums offered. This refers to premiums remaining constant throughout the years (i.e. same premiums at year 1 and year 40 of your policy) thus allowing you to lock in the cost of your premiums and avoid the possibility of premium increases in future. A fixed term plan therefore offers premium certainty as the policyholder can ensure that he/she will pay the same premiums for his/her entire period of insurance.

Renewable term plans on the other hand are subjected to future fluctuation in premiums. This is because premiums for renewable term plans are only fixed for the short period of coverage and may increase at every renewal. This means that what you pay to renew your policy at age 25 would likely be different from what you pay for renewal at age 55.

(See "When Is Term Insurance Better For My Child?")

Get a fixed term plan if you are young and want to purchase long term coverage

Fixed term plans tend to be cheap for those who are young and healthy. While the upfront premiums of fixed term may be slightly higher than that of a renewable term plan, this is unlikely to have an effect in the long run. Moreover, with fixed term plans offering level premiums, you can rest assured knowing that your payable premiums are guaranteed with no chances of a premium hike in future.

Therefore, we recommend individuals to consider purchasing fixed term plans if they are looking for long term coverage.

^{Profile: Age 30, non-smoker male for $500,000 death and total permanent disability (TPD) coverage to age 65.}

^{*The premium rates shown above are the indicative premiums for future renewals at the time of each renewal and are not guaranteed.}

^{Total premiums paid to-date does not take into account present and future values. Accurate as of 12 April 2021.}

Yes, I'm Interested!

With the two types of term plans intended for different purposes, there is no such thing as a "superior" term plan. Instead, individuals who are looking for term coverage should first determine their intentions in purchasing a term plan. This will allow them to identify the type of term that would best suit their needs. In our next article "When is a renewable term insurance the better option?", we highlight the instances when a renewal term insurance plan may be suitable for you.

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