Most life insurance policies last for several years, during which you pay a premium to keep the coverage active and the policy pays out if you die during the active period. Term life insurance policies last 10 to 30 years and permanent policies last for life.
Renewable term life insurance works the same way, but terms only last one year. The policy has to be renewed every year at a higher premium if you want to keep your coverage. Annually renewable term is best for short-term life insurance needs because it eventually becomes more expensive than a comparable term life insurance policy.
What is annual renewable term life insurance?
An annual renewable term policy is a one-year life insurance policy with an option to renew once per year. Unlike traditional term life insurance, rates start low and go up every time you renew your policy based on changes in your health and age.
How annual renewable term insurance works
Annual renewable life insurance works just like a term life policy with a longer coverage period. If you die while your policy is active, your beneficiaries get a death benefit from the insurance company.
Traditional term life insurance policies usually have a guaranteed level premium, meaning that your premiums stay the same throughout your entire policy term. Your premiums can only go up if you let your policy lapse or change your coverage amount.
Annual renewable insurance rates are often lower than what you’d pay for a similar traditional term life policy. But, the rates go up every time you renew your policy. They'll eventually be much higher than rates for a guaranteed level policy.
What affects the cost of annual renewable term life insurance?
Life insurance premiums reflect how risky it is for your provider to insure you — i.e., how likely it is you’ll die during your term. The younger and healthier you are, the lower your premiums will be.
For renewable term life insurance policies, the provider calculates your premium based on the risk that you’ll die that year, which becomes more likely as you age or develop health conditions.
By contrast, traditional term life insurance policies base your premium on your health and age when you buy your policy. A 40-year-old can pay the same premiums that they did at age 25 while a 40-year-old with an annually renewable policy would pay significantly more.
Who should get annual renewable term life insurance?
You’re almost always better off buying a traditional life insurance policy with a longer term for its level premiums. Annual renewable insurance is best for people in specific circumstances, such as:
A traditional policy is out of your budget. If you can’t afford regular term life insurance, the initial premiums of a renewable policy may be easier to afford for a short period.
You only need temporary coverage. In rare cases, you may only need a short-term policy (e.g., if you're covering a short-term loan). An annual renewable policy may be more cost-effective in this case.
You’re improving your health or habits. Life insurance companies may lower your premiums if your health improves or you quit an unhealthy habit. But, you need to show improvement for a year or more. A renewable policy may save you some money until you can qualify for a long-term policy that fits your budget.
For most other people, a level term life insurance policy is a better value. If you get sick, your annual renewable coverage could become too costly or you might become ineligible for the policy. With a traditional policy, your coverage can't become more expensive or be canceled due to health changes as long as it remains active.
Can you add riders to annual renewable term insurance?
You can buy additional coverage and customizations — known as riders — for your annual renewable life insurance like you can for a traditional policy. Some riders are automatically included at no cost, while others may require a small additional fee.
Some common renewable term life insurance riders include:
Accelerated death benefit: Often included at no cost, this rider allows you to use some of your death benefit to pay for end-of-life care if you become terminally ill.
Accidental death: While your policy pays out for most causes of death, this rider pays an additional benefit if you die due to accidental bodily injury.
Child insurance: Child riders provide some coverage for your children without the high costs of a standalone child life insurance policy.
Spousal insurance: Like a child rider, a spousal rider adds some life insurance coverage for your spouse to your policy. Costs and coverage are lower than an individual policy for your spouse.
Waiver of premium: Also known as a waiver of premium for disability, this rider waives your premiums if you become disabled and can't work.
Annual renewable life insurance is best used for specific short-term life insurance needs. For the average person, a traditional term life insurance policy offers more affordable premiums long-term and simpler coverage that doesn’t require yearly renewals.
If you think an annual renewable policy is right for you, speak with a Policygenius agent to go over your options.
Frequently asked questions
What is annually renewable term life insurance?
An annual renewable life insurance policy provides coverage for one year, after which you must renew it at a higher premium.
What are the pros and cons of an annual renewable policy?
Annual renewable policies are more affordable than traditional term life insurance for a short period, so they can be cost-effective if you have a temporary insurance need. Eventually, it becomes too expensive.
Are other types of life insurance renewable?
You may be able to renew a traditional term life insurance policy at the end of your term at a higher premium. To get the best rates, it’s better to shop around.