Typically, term life insurance offers coverage for a set number of years. With annual renewable term (ART), you’re basically buying a new policy each year — but it can get very expensive.
What is annual renewable term life insurance?
Annual renewable term life insurance is a one-year policy that your provider guarantees to renew each year for a set number of years. This is known as the “insurability period.” During that period, you’ll be able to renew your coverage without reapplying or taking another medical exam.
How does annual renewable term life insurance work?
ART policies are designed to cover short-term needs. They work just like traditional term policies in that if you die during the term, your beneficiaries receive a death benefit. But the major difference is how the premiums are calculated. Since you’re essentially taking out a new life insurance policy each year, the rates are low at first, and increase year-on-year when you renew your coverage.
Can I add riders to my policy?
Yes. The options vary between providers, but you may be able to customize your coverage with these common riders:
Waiver of premium rider. Pauses your premiums if you become disabled and can no longer work.
Accelerated death benefit rider. If you’re diagnosed with a terminal illness, this pays out part of the death benefit to help you pay for end-of-life expenses.
Automatic benefit increase rider. Boosts your coverage by a certain percentage each year.
Pros and cons
Pros
Flexible life insurance. ART is ideal for those who need to bridge gaps in their coverage, or only need life insurance for a short period of time.
Easy renewals. If you choose to renew your policy within the insurability period, you won’t need to take another medical exam.
Customizable coverage. Like traditional term policies, most insurers allow you to add common riders to your coverage.
Ideal for past smokers. If you’ve quit smoking, you could pay lower premiums with ART until you’re officially classified as a non-smoker in your insurer’s eyes — which is usually two to five years.
Cons
Rates increase over time. With ART, the premiums increase each year to reflect your age.
Age limitations. You can renew your policy each year up to a certain age, which varies between states. After that, you’ll need to look into other types of life insurance.
Strict about terminal illness. If you develop a terminal illness during your term, you might not be able to renew your policy the following year — leaving you uninsured.
Is ART right for me?
ART is best for people who only need life insurance for a short, set period of time.
When it makes sense
These are a few situations where it might make sense to opt for annual renewable term life insurance:
You want to cover a short-term debt or expense. Maybe you only have a year or so left on a loan. In this case, annual renewable term life insurance could offer peace of mind.
You need life insurance as part of a divorce decree. If you’re ordered to buy life insurance by the court, an ART policy could meet that requirement.
You’re temporarily doing a dangerous job, like mining or logging. This policy could stay in force for as long as you’re walking into a risky workplace each day.
You can’t afford traditional term life insurance. If you can’t squeeze a regular term life policy into your budget right now, you might consider buying an ART policy and cancelling it when your financial situation changes.
You’re planning to quit smoking. As a smoker, you won’t be eligible for most providers’ preferred rates, which means you’ll automatically pay more for life insurance. You could purchase an ART policy while you’re in the process of quitting, and potentially score lower premiums in the meantime. When you’ve been tobacco-free for one to five years, you may be able to access those preferred rates and buy a long-term policy.
You’ll have life insurance soon with a new employer. Starting a new job? If you’ll be enrolling in group life insurance or purchasing supplementary insurance through your employer, ART could bridge the gap in the meantime.
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On the other hand, you might want to avoid annual renewable term life insurance if:
You’re older, or have health issues. With ART, your premiums will rise as you age, and may become unaffordable. If you go with traditional term life insurance, your premiums won’t change for the life of the policy.
You’re over the maximum age that you can renew your policy. You can renew your policy each year up to a certain age, and that age varies by state. After that, you’ll need to explore other life insurance options.
You need life insurance for long-term needs. If you’re buying life insurance to cover long-term debts or expenses, it will be much cheaper in the long run to buy a term or permanent policy.
You’re on a budget. Since the premiums rise year-over-year, ART policies are not the most affordable option. If you’re on a budget, you might be better off buying a regular term life policy with level premiums. That way, you know exactly how much you’ll pay each month or year for coverage.
Insurability period, explained
When you apply for an annual renewable term life policy, you’ll lock in an “insurability period” which lasts anytime between five and 30 years. This means you can renew your policy annually with no proof of insurability (i.e. no questions asked).
Your insurability period is hinged on your age. Each state has a maximum age limit for ART policies. For example, it’s 80 in New York. So if you’re 60 and living in the Empire State, you’ll be able to apply for an insurability period of up to 20 years.
How to get annual renewable term life insurance
The process is much the same as applying for any other type of life insurance:
Research life insurance carriers, and compare policy features and riders.
Get quotes from a handful of your top providers.
Choose the best policy and select an insurability period.
Apply for coverage.
Pay your annual premium.
Each year, decide whether or not you want to renew your ART policy.
Cost of annual renewable term life insurance
When calculating your premium, your insurer will assess the risk of you dying that year. The longer you have the policy, the higher those chances are — which is why ART policies can get very expensive as you age.
Your insurer will give you a “schedule of premiums” chart. This maps out the maximum possible premium you can be charged each year, so you can avoid any major surprises. They’ll then tell you the exact amount you’ll need to pay each year at renewal time.
If you’re young, healthy and only need life insurance for a short period, annual renewable term life may be a cost-effective option. But otherwise, you might end up paying more in premiums than you would have if you purchased a traditional term life policy.
Alternatives to annual renewable term policies
If ART doesn’t meet your needs, these are your other term life options:
Level term life insurance. The most popular term policy, level term offers protection for a set period of time, like 5, 10, 15, 20, 25 or 30 years. It’s predictable: You’ll pay the same amount of money each month until the term expires, and if you die, your beneficiaries will receive a guaranteed death benefit.
Decreasing term life insurance. Like level term, decreasing term life insurance has stable premiums, but the death benefit gradually decreases — either monthly or annually — over the life of the policy. The terms usually range between one and 30 years, and most people buy this coverage when they know their need for life insurance will decrease as time goes on.
Laddering term policies. Also known as “layering,” this strategy involves buying multiple term policies of different lengths to match your financial obligations. For example, if you have young children and a 30-year mortgage, you might buy a 20-year term life policy to carry your kids through college, and a 30-year policy to cover your mortgage. That way, if you die, your family will be free from those debts and expenses.
Bottom line
Think of annual renewable term life insurance as a one-year contract. You can renew your policy each year until the insurability period is up. But the longer you renew, the more costly it becomes.
With annual renewable term life insurance, you’ll typically make one payment per year. This differs from other types of life insurance, where providers will process payments monthly or quarterly.
No. The death benefit stays the same for the insurability perod.
Yes. The details vary between providers, but typically, ART policies can be converted to whole life in the first few years, or when the policyholder turns 65.
Katia Iervasi is a lead writer and spokesperson at NerdWallet and a former editor at Finder, specializing in insurance. Her writing and analysis on life, disability and health insurance has been featured in The Washington Post, Forbes, Yahoo, Entrepreneur, Best Company and FT Advisor. She holds a BA in communication from Australia's Griffith University.
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