Understanding Annual Renewable Term Life Insurance

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

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If you’re looking for cheap life insurance, or a policy that covers a very short period of time, you may encounter an option called “annual renewable term life,” or ART.

Annual renewable term life insurance lets you lock in your rate for a year at a time, and the initial low price can be appealing. But be aware that the cost will likely rise every year, and you may end up paying more than you would with other types of life insurance.

How does annually renewable term life insurance work?

An annually renewable policy is a type of term life coverage that renews every year. You typically lock in a period of insurability, which is the length of time you’ll be able to renew the policy without reapplying or taking another life insurance 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. The policy’s face amount — the benefit paid if you die — stays the same.

To compare, many term life insurance policies have level premiums, which means the cost stays the same every year until the coverage ends. Term policies with level premiums are more popular than annual renewable term life.

How much does annually renewable life insurance cost?

Here are annual rates for a $500,000, 10-year annual renewable term life policy compared with a 10-year term life policy with level premiums. These sample rates are based on a healthy 30-year-old.

Age

Annual renewable term life

Level-premium term life

30

$133.

$145.

31

$148.

$145.

32

$158.

$145.

33

$170.

$145.

34

$180.

$145.

35

$190.

$145.

36

$200.

$145.

37

$210.

$145.

38

$223.

$145.

39

$238.

$145.

10-year total

$1,848.

$1,450.

Source: Quotacy, Jan. 25, 2022. Level-premium term rates shown are lowest three rates averaged. ART rates from American National.

Is annual renewable term life right for you?

Annually renewable term life insurance may be a good fit if you need to cover short-term debts, or are between jobs and anticipate buying group life insurance through a future employer.

For most people who need life insurance, however, locking in a term life insurance rate for at least five years is a better financial decision. And if you need life insurance to replace your income or cover a long-term debt like a mortgage, buying a 20- or 30-year level term life policy is likely to be your best bet.

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 term policy with level premiums. Therefore, this type of insurance is typically recommended only if you have short-term life insurance needs.

Before you buy, it’s a good idea to compare life insurance quotes and consider your options. For an annual renewable policy, be mindful of how much you’ll pay in future years, not just the first year’s premium.

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

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