Understanding Annual Renewable Term Life Insurance

With annual renewable term life insurance, premiums generally start out low but rise with each passing year.
Amy DaniseMar 17, 2015

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When you set out to buy life insurance, you have a wide selection of types of life insurance. One of your first decisions is whether to buy term life or a permanent life insurance policy such as whole life. If you’ve decided on a term policy, be aware that there’s an option called “annual renewable term life.”

Term life insurance is often attractive because you don’t have to make many decisions to buy a policy. You choose the benefit amount that would be paid upon your death (for example, $250,000 or $1 million) and the length, or term, of the policy.

Typical policy lengths are five, 15, 20 and 30 years. A “level term” policy guarantees that your premium will stay the same for the full length of the policy. But you can also buy a term life policy that lets you renew on a year-by-year basis.

Going year by year

For most people who need life insurance, locking in a term life insurance rate for at least five years is the best financial bet. And for many, locking it in for decades is the right decision to ensure income replacement and cover debts such as a mortgage.

But some customers want to hedge their bets with annual renewable term life insurance. A person might buy annual renewable term life because he or she wants to cover only very short-term debts, or is between jobs and anticipates buying group life insurance through a future employer.

Annual renewable term life insurance lets you lock in a period of “insurability,” which is the length of time you’ll be able to renew the policy annually without reapplying or taking another medical exam. You can renew the policy each year up to a certain age. The maximum age can vary by state. For example, New York law sets the age limit at 80.

The premiums generally start out low and look attractive. However, your premium will rise with each passing year based on your new age and your increased statistical chance of dying. The policy’s face amount — the benefit paid if you die — stays the same.

Your policy will include a “schedule of premiums” chart that shows the maximum possible premium you can be charged each year. Your insurer will inform you of the exact amount each year at renewal time.

Cost may end up higher

The main pitfall of annual renewable term life insurance is that if you renew for many years, you could end up paying more in premiums than you would if you had bought a level term life or permanent life insurance policy in the first place.

Annual renewable term life has similarities to level term life insurance policies:

  • You’ll designate at least one beneficiary.

  • There may be optional riders that you can add, such as a disability rider. This rider pays your premium in the event you become disabled.

  • There will probably be a suicide exclusion, meaning the policy won’t pay out in the event of suicide in the first two years. In such a case, the insurer would refund the premium that was paid.

If you do buy an annual renewable term policy and then find that your coverage needs are longer, check with your insurance company. It may let you convert the policy to whole life insurance without taking another medical exam.

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