Sometimes it’s hard to look too far into the future. This is where an annual renewable term life insurance product can help.
Finding the right type of life insurance isn’t really anyone’s idea of a great time. For one, most people – naturally – don’t enjoy the idea of thinking about their own mortality. In addition, life insurance policies can be complicated and confusing.
There’s no one best type of life insurance. So, even if you buy a policy, there’s a possibility the policy won’t the optimal option for your specific situation in 5 or 10 years down the road. But don’t worry if you’re feeling overwhelmed by the whole process – we’re here to help.
Today we’re discussing annual renewable term life insurance, also called yearly renewable term.
Where Does Annual Renewable Term Life Insurance Fall?
First, let’s simplify things a little bit. There are basically two broad categories of life insurance:
- Permanent Life Insurance – a policy which can last your entire lifetime
- Term Life Insurance –a policy which will, eventually, increase in premiums after a designated time frame
Many people, especially young and healthy people, opt for term life. The main advantage here is you’re able to lock in level premiums for a long period of time, up to 30 years or more. No matter what happens, even if you were to become ill just a few years into the policy, your premiums will not change for however long you locked them in for.
Term policies also help eliminate a lot of confusion about life insurance. You simply choose the benefit amount and the term length. These policies are usually available in five, 10, 20 and 30 year terms. But they also come in a shorter duration, which is called annually/yearly renewable term.
Annually Renewable Term (ART) / Yearly Renewable Term (YRT)
There is an often under utilized term product. Called the annual renewable term life, this is when you renew your term life policy on a yearly basis, though it doesn’t require any additional medical requirements (only a higher premium). Instead of committing to a longer term period, you have the option each year whether or not to continue your coverage.
You can keep your coverage and pay more, convert it to a more permanent product, or cancel your insurance.
Generally, the longer the term you’re willing to commit to, the lower your rates will be in the long run. This is because you’re staying ahead of rising medical costs due to inflation. But, sometimes a long term isn’t the best option. Here are some situations where a person might be interested in a year-to-year term:
- They’re interested in only covering short term debts and obligations
- They anticipate employer-based coverage will begin sometime in the near future
- They want to gain an understanding of the provider’s level of service without making a big commitment
- They only have a few working years left, usually less than five
- They are quitting smoking, but hasn’t been a long enough time period to qualify for non-smoker rates
How Annual Renewable Term Life Insurance Works
This annual term allows you to “lock in” up to 12 months, where you can then renew without having to reapply or take a medical exam. This is called your level of “insurability.” Usually, you’re ability to reapply is limited by a maximum age, however. Maximum age limits vary, but generally the limit is around the age of 80 or 85.
Premiums for a annually renewable term plan are initially very low, but they do increase quickly. The exact amount will depend on your age and initial health, and each year will increase faster and faster.
These policies include a chart which shows the schedule of premiums. This will show the maximum possible premium you’ll be charged each year, which can help you with longer term planning. The death benefit, however, does not change either up or down.
Term policies, both annual ones and those with longer time periods, have the following features:
Ability to choose one or more beneficiaries. These can be family, friends or anyone else you choose.
Optional riders can be included. Some common ones are disability riders and riders dealing with end-of-life care.
Convertibility. While term can be good to have a large death benefit for a short duration, it can also provide easier access to permanent coverage through conversion, something an annual renewable term offers.
Hidden Benefits of Yearly Renewable Term Policies
The name of the game is low cost, but there are also several sweet spots a YRT can hit which most agents don’t recommend to their clients. For example, as noted above, an ART is excellent for smoker’s who are in the middle of quitting.
For a smoker to get non-smoker rates, they need to have not touched a cigarette for at least one year. But what if the person is only 7 months in? The annual renewable policy is an excellent choice to get super cheap coverage, for at least one year, then re-apply as a non-smoker after the 12+ months has passed.
This let’s a smoker have the important coverage they need without paying the extra premium of a 5 or 10 year policy.
A less popular life insurance option, it has a very high utility when used properly. However, one mistake a lot of people make is assuming they can just keep the policy and pay the slightly higher premiums each year until they don’t need it. While it sounds good, it’s a flawed plan.
If you plan to keep a term policy for at least 7 years, shy away from this product and look at a 10 year term. You’ll save in total paid premiums.