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Annual Renewable Term Life Insurance

Annual renewable term life insurance covers you for a term of one year, then renews every year at an increasingly higher premium.

When you have life insurance, your beneficiaries will receive a payout (the death benefit) from the life insurance company when you die, as long as your life insurance policy is still in effect. You keep your life insurance policy in force by paying your premiums.

With a term life insurance policy, you pay premiums monthly or annually for a given period of time, the term, which is usually 10, 20, or 30 years. If you die during the term, your beneficiaries will receive a death benefit. But if you’re still alive at the end of the term, the policy expires.

Annual renewable term life insurance functions the same way, but with three differences: The term only lasts one year, and the policy gets renewed for another term at the end of that year. Under an annual renewable term life insurance policy, your premiums start lower than those for comparable term policies with decades-long terms. However, each time you renew the policy, your premiums become more expensive.

Read on to learn more about annual renewable term life insurance:

What is annual renewable term life insurance?

An annual renewable term policy is a one-year policy that the insurer guarantees to renew each year for a set number of years.

How it works

Annual renewable life insurance works just like term life policies that have 10-, 20-, and 30-year terms. If you die while the term is active, your beneficiaries get a death benefit from the carrier. However, the term in an annual renewable term policy only lasts one year, after which it’s renewed for another year, for a set number of years.

Traditional term life insurance policies typically have a guaranteed level premium, meaning that your premium rates at the time of purchase are the same throughout the term of the policy. (Guaranteed level premium policies average out the cost over the life of the policy.) Your premiums will only go up if you let your policy lapse and try to purchase the same policy again.

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Under an annual renewable policy, your premiums start out low, usually lower than what you’d pay for a comparable term life policy with a decades-long term. However, the policy’s rates increase with each year that you renew your policy, until they eventually exceed those of a guaranteed level policy.

That’s because life insurance becomes more expensive to purchase as you age, become less healthy, and thus increase the risk to the insurer that you’ll die. Annual renewable term life insurance policies calculate your premium based on the risk that you’ll die that year, which becomes increasingly likely the longer you have the policy; by contrast, 10-, 20-, and 30-year term life insurance policies calculate your premium based on the risk that you’ll die during the respective term.

Other term life insurance coverage may also be renewable. Check your policy or talk to your insurer. However, although you were guaranteed level premiums through the term, you’ll have to pay considerably higher premiums if you renew your term policy when you’re much older.

If you need a renewable term life insurance policy, whether with a one-year term or a 30-year term, Policygenius can help you get free quotes and compare coverage online.

Riders

As with other types of life insurance, you can get additional or enhanced coverage for your base term life insurance policy. A rider, as this extra coverage is known, may cost you extra or could be part of your policy at no extra cost.

Some renewable term life insurance riders include:

Accelerated death benefit

If you’re are diagnosed with a terminal illness, you may be able to start receiving part of the death benefit to pay for your end-of-life care. This will reduce the amount of the death benefit paid out to your beneficiaries when you die.

Automatic benefit increase

If you need more coverage as you get older — and most people actually don’t, because they have fewer people who depend on them as they age — this rider will increase your benefit amount by a certain percentage each year. However, you’ll also have to pay higher premiums to account for the increased benefit.

Waiver of premium

This rider allows you to stop paying your premiums but keep your policy in force if you become disabled and can’t earn the same level of income.

Pros of annual renewable term life insurance

There are many reasons to buy annual renewable term life insurance, including:

  • Initial lower premiums. If you’re making lower wages now but expect to be making much more in the near future, you might consider purchasing annual renewable term life insurance and canceling it when you can afford a more traditional term policy. However, term life insurance policies are already inexpensive if you’re young and healthy, so you won’t save much.

  • You only need temporary coverage. In rare cases, you might only need temporary coverage, in which case an annual renewable policy would be cost-effective if you cancel it before the premiums start becoming unaffordable.

  • You’re a smoker, but you’re going to quit. Life insurance rates are calculated using a classification system. If you’re a smoker, you’re going to get a less favorable insurance classification, meaning you’ll pay higher premiums. Buy an annual renewable life insurance policy while you’re trying to quit, and you may enjoy lower premiums in the meantime. When you’re tobacco-free for two to five years (depending on how your carrier’s underwriting process works), you may qualify for a better insurance classification.

Cons of annual renewable term life insurance

On the flip side, there are reasons many people should avoid annual renewable term life insurance:

  • Your premiums could quickly become unaffordable. With guaranteed level policies, you’ll pay the same premium you paid when you’re young and healthy that you’ll pay when you’re older and less well. With an annual renewable policy, your premiums will increase with age. The early savings may be appealing, but they may quickly become more expensive than you expected.

  • It doesn’t play nice with terminal illness. Your eligibility to get life insurance coverage in relation to your health background is called your insurability. If you’re too sick, you might not be eligible for coverage. With an annual renewable policy, if you develop a terminal illness during the one-year term, but don’t die during that year, you may not be eligible for renewal the following year. That is, you have no insurability, which means you could be completely without coverage at the time you need it most.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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