Annual Renewable Term Life Insurance: Is It Right For You?
Traditional term life insurance will require you to sign a contract for a policy with a 10-30-year coverage period. But, if you only need coverage for a short period of time, you might be wondering if getting an expensive, long-term life insurance policy is a good deal for you.
If this is the case, you might be interested in an annual renewable term (ART) life insurance policy. This type of insurance provides coverage for an entire year and may be renewed without having to reapply. That way, you can provide your family with financial protection while being able to renew or terminate your policy depending on your current situation.
In this guide, we'll talk about the pros and cons of yearly renewable term life insurance. We'll also answer some of the most frequently asked questions on the topic.
What Is Annual Renewable Term Life Insurance?
Annual renewable term (ART) life insurance is a type of policy that provides coverage for one year. If the policyholder dies within the coverage term, then the insurance company will pay out a death benefit to the owner's beneficiaries.
The best part about annual renewable term insurance is that it guaranteed future insurability for up to a set number of years. Even if your health declines in the current year, you would still be able to get coverage next year without taking a medical exam. Some types of yearly renewable term insurance policies will guarantee insurability until your 80s and beyond.
How Does Annual Renewable Term Life Insurance Work?
For this type of life policy, the insurance company recomputes your premium rates upon renewal. So, your premiums will increase each year depending on your age. Meanwhile, the death benefit remains constant.
Compare that with traditional level-term policies, where premium rates remain constant throughout the coverage period (typically 10 to 30 years). That makes them more affordable if you wish to keep your policy for several decades. However, some types of level-term life policies cannot be renewed once the term expires.
Benefits Of Annual Renewable Term Life Insurance
Annual renewable term life insurance offers several benefits. Here are the main reasons people buy an ART life insurance policy.
Get Insured While You're In Between Jobs
If you are covered by your employer's group life insurance policy but suddenly find yourself out of work, buying annual renewable term life insurance is one of your best options. The annual renewable term insurance policy will provide you with temporary coverage for one year while you look for a new employer that offers the same group life insurance coverage as your previous one.
Avoid Paying Expensive Insurance Premiums For Decades
If you have just recovered from a chronic illness or have just quit smoking, then you'll be charged higher premiums. That's because the insurer will put you in a higher risk group compared to those with an average life expectancy. What's worse, if you buy a traditional level term policy, you'll be paying those premium rates for the next 10 to 30 years even if your health has improved.
To avoid this situation, you can start with an annual renewable term life policy, which you only have to use for one year. Later, when your health improves, you can apply for a level-term life insurance policy and pay cheaper premiums for the next decade or so.
Lower Initial Premium Rate
If you're young, you may be charged cheaper premiums for a renewable term life policy compared to a level term life policy. This is a good temporary option if you're on a budget and cannot afford the premium rates for a 20-year or 30-year term policy.
However, keep in mind that as you get older, your ART life insurance rates will increase. Eventually, the cost of ART will match or exceed what you would pay for a level-term life insurance policy. You might want to switch to a longer-term policy once you can afford to pay a more expensive annual or monthly premium.
Get Additional Coverage For Your Loans
If you've taken out a huge loan that's payable within the next 1-3 years, then getting additional coverage may be a good idea. Even if you pass away within the coverage period then you won't leave your family with the financial burden of paying off the outstanding balance from those debts.
You can go with this option if you've taken out a loan to start a business, pay your child's college tuition, make home renovations, or cover medical emergencies. You can renew the policy until you've paid off most of these large debts.
Frequently Asked Questions On ART Policies
Getting an annual renewable term policy doesn't have to be confusing. Here are answers to some of the most frequently asked questions on this topic.
Can I know in advance how much my premium will increase each year?
Yes. By law, your insurance company should provide you with a table that shows how much your premium will increase annually. That way, you don't have to be shocked by the cost of your premium each time you renew your policy.
Can I add riders to my renewable term life insurance policy?
Yes. As with other types of term life insurance products, ART policies can come with riders. These riders are extra benefits that come with your term life policy.
For this type of life insurance, one rider you can seriously consider is the automatic benefit increase rider. This feature allows you to increase the death benefit amount by a certain percentage each year you renew the policy.
Keep in mind that increasing the face amount every year may also have an effect on your premium rates. Discuss this feature with your agent carefully before getting it.
Can I renew this term life policy even if I develop a serious illness?
Yes, because annual renewable term policies come with guaranteed insurability. You can continue to renew your term coverage regardless of your condition.
Can I convert my yearly renewable term insurance to a permanent plan?
It depends on the insurance company. Some insurers will allow you to convert your yearly renewable term policy into one that provides permanent coverage. You can also find insurers that provide you with an option to convert your ART insurance to a plan with a 20-year or 30-year term.
Keep in mind that your conversion options will get more and more limited as you get older. When this happens, you can opt to purchase a new policy instead.
How much coverage do I need?
Most experts recommend that you purchase a term or whole life policy with a coverage amount of up to 10 times your annual income. That way, your family can use the proceeds from your policy to cover their daily living expenses for the next decade.
If you're only purchasing a yearly term life policy to cover existing debts, then you only need a policy with a death benefit that's equal to your loan's outstanding balance. Let's say, you borrowed $25,000 to get your house renovated. In this situation, you'll only need to buy a policy with a face amount of $25,000 and nothing more.
As always, don't forget to consult your financial advisor to help you decide on the most affordable term policy based on the coverage amount you need.
Annual renewable term policies can be an excellent option for people who only need coverage for one year. You can continue renewing these term policies without having to provide evidence of insurability, like the results from a recent medical exam.
If you want to learn more about how annual renewable term insurance policies work, get in touch with Wesley Insurance, LLC. We'll talk to you about your best options, especially for short-term life coverage.