Telomerase is an essential cellular ribonucleoprotein (RNP) that solves the end replication problem and maintains chromosome stability by adding telomeric DNA to the termini of linear chromosomes. Genetic mutations that abrogate the normal assembly of telomerase RNP cause human disease. It is therefore of fundamental and medical importance to decipher cellular strategies for telomerase biogenesis, which will require new insights into how specific interactions occur in a precise order along the RNP assembly pathway. Here we use a single-molecule approach to dissect the individual assembly steps of telomerase. Direct observation of complex formation in real time revealed two sequential steps of protein-induced RNA folding, establishing a hierarchical RNP assembly mechanism: interaction with the telomerase holoenzyme protein p65 induces structural rearrangement of telomerase RNA, which in turn directs the binding of the telomerase reverse transcriptase to form the functional ternary complex. This hierarchical assembly process is facilitated by an evolutionarily conserved structural motif within the RNA. These results identify the RNA folding pathway during telomerase biogenesis and define the mechanism of action for an essential telomerase holoenzyme protein.