You probably know the basic difference between whole life insurance and term life insurance.
Whole life insurance is permanent coverage, with a fixed premium, and a cash value accumulation feature.
Term life insurance is temporary coverage, generally lasting for between five and 30 years. It has no cash value accumulation, which is why it costs only about 10% as much as a whole life policy with the same death benefit.
But did you also know that there are different types of term life insurance policies as well?
One of them is annual renewable term life insurance. It works like other term life insurance policies, but it’s a much shorter term in nature.
There are benefits and drawbacks, but there are times when annual renewable term life insurance is the right policy choice.
In This Article:
What is Annual Renewable Term Life Insurance?
As the name implies, annual renewable term life insurance is a term policy that runs in increments of one year. That is, the initial premium will apply for exactly one year. After that, the policy (generally) automatically renews, but at a slightly higher premium each year since you will be one year older.
Even though the premium adjusts on an annual basis, that doesn’t mean annual renewable term life insurance is necessarily a short-term policy (although it certainly can be).
When you purchase a policy, you can lock in a period of insurability. That’s the number of years over which your policy will be automatically renewable.
For example, you can choose an annual renewable term life insurance policy with a period of insurability of 20 years. Even though your premium will adjust higher each year based on your age, you’ll be able to keep the policy in force for the full 20 years. No medical qualification will be required at the time of renewal.
In most cases, you’ll be able to renew the policy on an annual basis up to a specified age limit. What that age limit is will be determined by insurance laws in your state of residence. If that age limit is 75, and you’re 25 at the time you take the policy, you’ll be able to keep it for as long as 50 years.
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Annual Renewable Term vs. Level Term Life Insurance
For the most part, annual renewable term life insurance works similar to level term life insurance, except in the premium structure. In fact, an annual renewable term policy may be included at the end of a level term policy.
With level term, you’ll pay the same annual premium over the course of the stated term of the policy. If it’s a 30-year level term policy, your premium will be the same every year for each of the 30 years.
However, when the policy term expires at the end of 30 years, it may have an automatic renewal provision. That will usually be less than the original term of the policy.
For example, at the end of a 30-year term policy, you may be able to renew in increments of five years at a time. But it’s also possible the policy will automatically convert to an annual renewable term life insurance policy.
That means the premium will adjust every year, up until the maximum age limit available on the policy. Naturally, when the term ends after 30 years, you’ll pay a much higher premium based on your much higher age.
An annual renewable term life insurance policy doesn’t offer an extended fixed term. Your premium will be paid based on your age at the time of each renewal. Translated, that means your premium will rise somewhat each year.
An annual renewable term life insurance policy has the advantage of being much less expensive than a level term policy. This is the basic nature of term policies in general – the shorter the term, the lower the premium.
Just as the premium on a 10-year level term policy will be much lower than that of a 30-year term policy, an annual renewable term life insurance policy will have the lowest premium of all. That makes it the most affordable type of life insurance, even among the various term options.
But on the flip side, the annual premium on an annual renewable term policy will eventually be higher than that of a level term policy. That’s the reason why an annual renewable term life policy works best only for short-term life insurance needs.
Optional Riders for Annual Renewable Term Life Insurance
Like other life insurance policies, you can add optional riders to an annual renewable term life insurance policy. Examples include:
- Waiver of premium: This is a provision that allows you to stop making premium payments – while retaining your insurance coverage – if you become disabled.
- Accelerated death benefit: If you come down with a terminal illness, usually defined as one that’s likely to result in death within 12 months, you’ll be eligible to receive at least part of your death benefits while you’re still alive. The funds can be used to pay for medical expenses or even living expenses. The unused portion of the death benefit will go to your beneficiaries upon your death.
- Automatic benefit increase: You can choose to have your death benefit increase by a specific percentage each year. That will enable you to get more life insurance coverage when you are (hopefully) better able to afford the premiums. Those premiums will be higher as a result of the additional coverage.
There are other options that may be available with an annual renewable term life insurance policy, so you’ll need to ask the insurance representative or broker about which may be available.
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Advantages of Annual Renewable Term
Low Premium Cost
The biggest benefit of annual renewable term life insurance is that it provides the lowest premium cost possible on a life insurance policy.
Once again, this is because of the very short-term nature of the policy. Insurance companies can charge lower premiums precisely because you’re much less likely to die within one year than you would be within, say, 20 years on a 20-year level term policy.
Annual renewable term life can also make sense if you’re only looking for coverage on a temporary basis. An example would be a time when you’re in between jobs.
You may have lost your employer-provided coverage with the end of your last job, but you expect to be re-employed in a few months. You can use a low-cost, annual renewable term life policy to keep you covered in the interim.
One or More Health Conditions
It may also be a good option if you have one or more health conditions that might make a longer level term policy unaffordable. The lower premium will make this possible, at least in the short run.
You can also use an annual renewable term life insurance policy to get coverage while you’re working on improving some aspect of your health profile. For example, let’s say that you are either a smoker or you’re classified as obese. Either would result in a higher premium on a level term policy or a whole life policy.
But since insurance companies commonly permit a premium reduction if you quit smoking or lose weight, the annual renewable term policy will give you the time you may need to make that happen. In such situations, most life insurance companies require that you’re smoke-free for at least two years, or that you maintain the lower body weight for a specific amount of time before applying for a longer-term policy.
You may be able to use an annual renewable term life insurance policy to buy yourself the two or three years you will need to accomplish those health goals. Once you have, you’ll be able to apply for a level term policy for a greater number of years.
Disadvantages of Annual Renewable Term
Annual Premium Increases
The single biggest disadvantage of an annual renewable term life insurance policy is the annual increases in your premium. The policy may work to your advantage for say, 10 years, when compared to a comparable death benefit on a 20-year level term policy. But after that point, the premiums for the annual renewable term policy will begin to gradually exceed those of the level term policy.
By the time you reach years 15 to 20, the premiums will be much higher on the annual renewable policy. For that reason, an annual renewable term life insurance is not a recommended choice if you’re looking for long-term coverage. This will certainly be the case if you have people who depend on your income, such as a spouse and/or children.
Shopping for Annual Renewable Term Life Insurance
Annual renewable term life insurance is a specialized life insurance product and one that can work a little bit differently from one company to another. The difference is often buried in the fine print of the policy documents.
For example, while one company may issue an annual renewable term policy that provides for automatic renewals each year, another may provide for cancellation at the insurance company’s discretion.
If you were to develop a serious illness during the one-year term, the fine print may contain an escape clause that allows the insurance company to decline renewal. That would leave you completely without coverage.
To avoid those hidden insurance landmines, it’s best to work with a life insurance broker. We work with many insurance companies and know the ones that have the most accommodating annual renewable term life insurance policies. Those are the companies we will place your coverage with, if you decide an annual policy is a right choice for you.
In fact, any time there’s anything in your personal profile that may make you anything other than a perfect life insurance candidate, it’s best to work with a life insurance broker. The companies that advertise the low premium rates are targeting young applicants in perfect health. If you have any health conditions, or if you’re much older than 45, those rates won’t be available for you. In fact, they may not even provide you with a policy at all.
But as an insurance broker, we work with all types of consumers. Whether you have a health condition, a high-risk occupation, or you want a unique type of life insurance product, like annual renewable term life insurance, we can find the right policy for you.