Annual Renewable Term Life Insurance Explained
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I’m sure you’ve heard of 10-, 20-, or 30-year term life insurance, but did you know you have another alternative called annual renewable term? In this post, I will explain the annual renewable term, pros & cons, and pricing compared to a level term life insurance.
What Is Annual Renewable Term Life Insurance?
Annual renewable term (ART) is temporary protection for a duration of one year. At the end of the year, you will not need to take an exam or go through the underwriting process again. Instead, your coverage is automatically renewable by paying your premiums.
- Every year, the premiums will be determined based on your attained age. The premiums gradually increase as you get older.
- Most ART expires when the insured reaches the age of 95.
- ART policies are fully convertible to whole life in the first few years, or when the insured reaches 65 (depending on the carrier and the policy).
- The death benefit remains level (the same) throughout the renewal years.
- With most companies, only the annual payment mode is available. You will not be able to pay monthly or quarterly.
How Yearly Renewable Term Works?
The annual renewable term, just like traditional term insurance, will pay a death benefit to your beneficiaries if you pass away during the time in which the policy is active. The period of insurability guarantees that you be able to renew your policy each year even if your health deteriorates.
With most companies, you can add riders to your policy, like terminal illness or a disability rider. Pay attention to the convertibility option, since not all companies offer that and there is an age restriction in which you can take that option.
Why on Earth Would Someone Buy ART?
It’s a good question, and I’ll start with the obvious. Level term insurance and whole life provide insurance for prolonged periods because those who buy these coverages are interested in income replacement or estate planning, which require a continued period of protection.
For others who are only looking for a short-term protection, the annual renewable term is an excellent choice. Here are a few other reasons:
- They have a current policy in force but need a supplemental coverage for a short-term loan or expense.
- They need to fill an employment gap because they are in between jobs. The future position will offer a group life insurance plan.
- Initially, ART premiums are lower when compared to a 10- or 20-year term. For some who have a few years left to retirement age (typically less than five), buying a 10-year term will cost more than buying yearly renewable term.
- When smokers apply for life insurance, they may pay three to four times as much as non-smokers. With most carriers, they need to be smoke-free for one to three years before getting the preferred non-smoker rate. If you just quit smoking, it may be a good idea to buy a short-term policy, and after a year, you can apply for a traditional term and get the non-smoker rate (as long as you quit the bad habit).
Level Term Life vs. Annual Renewable Term
I’m sure you are curious to see if you could save money by buying annual renewable term versus purchasing a level term for 10, 20 or 30 years. Below, I have created a table, taken from Prudential, in which I compare the premiums of ART and 10-, 20- and a 30-year term.
ART vs. 10-Year Level Term Insurance
As you can see from the table below, a 40-year-old male in a preferred health class will have a starting payment on ART of $265 while the 10-year term starts at $445. However, as the years go by, especially the third year onwards, the premiums on ART are more expensive.
ART vs. 20-Year Level Term Insurance
On this chart, the same 40-year-old male will save money on ART for the first three years when compared to a 20-year term. In the fourth year, he will pay $970 per month while the level term the premium of $475 will remain the same for 20 years.
ART vs. 30-Year Level Term Insurance
The same goes for this chart. The savings on ART are only for the first three years when compared to a 30-year term. By the fourth year, you will be paying $970 while the 30-year offers a level premium of $665 for 30 years.
Schedule of Premiums—Life Insurance Illustration
You will not be surprised or shocked by the increased premium cost every year. By law, the insurance company is required to provide you with an illustration. The illustration shows the maximum premiums for each year, total premiums paid every five years, and the death benefit.
The insurance carrier cannot charge you a higher premium than what you see on the illustration. Below, I’ve included a sample chart with a schedule of premiums.
We hope this article has helped you to understand ART policies. For most people, a traditional long-term protection is a right solution when buying life insurance. The premiums remain level for 20 or 30 years, and they don’t have to think about the new premium every year. The longer-term length you buy, the longer your premium is fixed, and if you decide that you no longer need the policy, you can always drop it.