Term Life Insurance: Renewable Option Explained

Renewable term life insurance is a type of life insurance policy that allows the beneficiary to extend their coverage for a set period without re-qualifying for new coverage. This type of insurance is beneficial as future health circumstances are unpredictable, and the beneficiary can keep their coverage even if their health deteriorates. Renewable term life insurance is usually recommended by financial advisors and can be a good option for those who need flexible or short-term coverage. However, it is important to note that the premiums for renewable term life insurance are likely to increase each time the policy is renewed, as they are based on the beneficiary's age.

Annual Renewable Term (ART) life insurance

ART policies are designed to cover short-term insurance needs. The policyholder pays monthly or yearly fees, known as premiums, on a one-year contract basis. These premiums tend to increase on renewal as the insured person ages. The policy pays a death benefit that remains the same with the contract's extension. ART policyholders designate at least one beneficiary who will remain the same unless the insured person explicitly states otherwise.

ART insurance is less common than level term insurance, which has a premium rate that remains unchanged for a specified number of years, usually between 10 and 30. While ART premium payments increase annually, level term premiums do not. ART insurance policies determine the premium based on the risk that a person will die in the current year, a probability that increases the longer someone has the policy. Level policies may have a term of up to 30 years, while ART policies are limited to one year.

ART policies can be a good option for those who need short-term coverage, such as individuals who are temporarily out of work or businesses that need continuity in the event of losing a key employee or business partner. However, for those requiring long-term coverage, level term insurance or permanent life insurance may be more suitable options.

Renewable term life insurance pros and cons

Renewable term life insurance is a type of insurance that allows the beneficiary to extend the coverage term for a set period of time without having to re-qualify for new coverage. This type of insurance is beneficial as future health circumstances are unpredictable. Renewable term life insurance is also a good option for those who need flexible or short-term coverage.

Pros

Renewable term life insurance offers several advantages:

• It provides the flexibility to extend coverage without undergoing new health underwriting, ensuring continued protection even if health issues arise.
• It is a good option for those who need life insurance for a short period, such as up to five years, but are unsure if they will still need it after that.
• It is also suitable for those with pre-existing conditions or a family history of health issues, as it allows for extension without being denied due to health reasons.
• Renewable term life insurance has low-cost initial premiums, making it affordable for those on a tight budget.
• It offers the flexibility to continue coverage, addressing the main drawback of term life insurance, which is that it eventually expires.
• There is no risk of future health denial with renewable term life insurance. It allows for extension without the need for medical exams or answering health questions.
• It offers a large death benefit for a low premium, making it possible to afford a significant payout to cover needs like mortgage payments or income replacement.

Cons

However, there are also some potential drawbacks to renewable term life insurance:

• The premiums can increase each time the policy is renewed, as they are based on the beneficiary's older age at the time of renewal. This can make the coverage less affordable over time.
• There are limits on how long the policy can be renewed, with insurers typically setting an age limit, commonly around 70 years.
• Renewable term life insurance does not build cash value, so it only provides a death benefit without any money that can be accessed while the beneficiary is still alive.
• The insurance company may charge a higher premium for a renewable term policy compared to a non-renewable one due to the increased risk of the beneficiary developing health conditions.

How does renewable term life insurance work?

Renewable term life insurance is a type of insurance policy that allows you to extend your coverage for a set period of time without reapplying or undergoing additional medical exams. This type of insurance is ideal for those who need flexible or short-term coverage and provides peace of mind for those who are unsure about their future health circumstances.

When you purchase a renewable term life insurance policy, you will pay monthly or yearly premiums like any other term life policy. The key difference is that, at the end of the term, you have the option to renew your coverage without undergoing a new health evaluation. This means that you cannot be turned down for coverage, regardless of any health issues that may have arisen since your original policy was issued. The renewable term gives you the flexibility to continue your coverage if you still have financial obligations, such as a mortgage or college tuition payments, when your original policy expires.

It's important to note that your rates will increase each time you renew, as they are based on your current age and other factors. While insurance companies usually limit how much rates can go up, the increased cost is often significantly higher than your previous rate. Additionally, renewable term life insurance does not build cash value, and there may be limits on how long you can renew, such as a maximum renewal age of 70 or 80.

When shopping for renewable term life insurance, you will most likely come across annual renewable term coverage. These policies allow you to extend your coverage every year up to a predetermined age, which can vary by state. For example, in New York, the age limit for annual renewable term life insurance is 80. If you're looking for a longer-term length, some policies will allow you to renew for multiple years at a time.

In summary, renewable term life insurance offers the advantage of continued protection, even if your health issues arise, but it comes with the potential drawback of increasing premiums over time. It is a good option for those seeking short-term coverage or those who are uncertain about their future health and want the flexibility to extend their coverage without undergoing additional medical evaluations.

When to buy renewable term life insurance

Renewable term life insurance is a type of policy that lets you extend your coverage at the end of the term without reapplying for a new policy or undergoing additional screening. Renewable term life insurance is best suited for those who:

• Need flexible or short-term coverage: If you're not sure whether you'll need coverage for an extended period, a renewable term policy allows you to decide when your initial policy is about to expire. This type of policy is ideal if you anticipate having financial obligations when your insurance expires, such as a mortgage or college tuition payments. Keep in mind that your rates will increase based on your age when you renew.
• Are improving their health or habits: If you're working on improving your health or quitting unhealthy habits, a renewable term policy can be beneficial. Life insurance companies may lower your premiums if your health improves or you adopt healthier habits, such as quitting smoking. However, it may take a year or more to qualify for lower premiums. A renewable policy can provide temporary coverage until you can qualify for a long-term policy that fits your budget.
• Have short-term coverage needs: Renewable term life insurance can be a good fit if you only need a policy for a short period, such as when dealing with a short-term debt, travel, work, or other life changes that are difficult to plan for.
• Need coverage immediately: An annual renewable term (ART) life insurance policy can be a good option if you need short-term life insurance quickly. While the initial premiums are typically low, they will increase each year.
• Are between jobs: If you're between jobs and anticipate purchasing group life insurance through a future employer, an ART policy can provide temporary coverage.

It's important to note that renewable term life insurance is generally recommended for short-term needs. If you renew for many years, you may end up paying higher premiums compared to a term policy with level premiums. Therefore, it's advisable to compare life insurance quotes and consider your long-term coverage needs before purchasing a renewable term policy.

Renewable term life insurance vs. convertible term life insurance

Renewable term life insurance is a type of life insurance policy that typically lasts for 10 to 30 years. It offers the flexibility to extend the policy when it ends, without having to reapply for insurance or undergo additional screening. This is especially useful if the insured's health has declined, as they can keep their current coverage, although at a higher premium. Renewable term life insurance is usually recommended for those who need short-term or flexible coverage.

Convertible term life insurance, on the other hand, offers the policyholder the option to convert their term life coverage to whole or permanent life coverage. This means that the insurance will last for the policyholder's entire lifetime. Like renewable term life insurance, the policyholder does not need to re-qualify or pass additional screening to make the switch. Convertible term life insurance is more expensive than renewable term life insurance, as permanent insurance has significant perks, including fixed premiums, lifelong coverage, and the accumulation of cash value.

Both types of insurance are beneficial in different ways. Renewable term life insurance is ideal for those who are uncertain about their long-term coverage needs and prefer lower premiums, while convertible term life insurance is suitable for those who want the option of permanent coverage without having to undergo additional screening.

It is important to note that both renewable and convertible term life insurance options may result in higher premiums due to the increased risk for the insurance company. Additionally, there may be age restrictions for converting or renewing policies, typically around 65 to 70 years old.

Frequently asked questions