Annual renewable term life insurance covers you for one year and must be renewed yearly at an increased premium.
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 functions the same way, but terms last only one year and the policy must be renewed each year at a higher premium. Annually renewable term policies are best for short-term life insurance needs, because premiums eventually become more expensive than those for a comparable term life insurance policy.
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An annual renewable term policy is a one-year life insurance policy with an option to renew at the end of each year. Unlike traditional term life insurance, premiums start low and increase every time you renew your policy.
Annual renewable life insurance works just like a term life policy with a longer coverage period. If you die while the term is active, your beneficiaries get a death benefit from the insurance company.
Traditional term life insurance policies typically have a guaranteed level premium, meaning that your premiums at the time of purchase are the same throughout your policy term. Your premiums will only go up if you let your policy lapse.
Under an annual renewable policy, your premiums usually start lower than what you’d pay for a comparable traditional term life policy. However, they’ll increase each year that you renew your policy until they eventually exceed those of a guaranteed level policy.
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.
With 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 45-year-old might pay the same premiums that they did at age 25 while a 45-year-old with an annual renewable policy would pay significantly more.
You’re almost always better off buying a traditional life insurance policy with a longer term due to its stability and level premiums. Annual renewable insurance is best for people in specific circumstances, such as if:
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 you improve your health or quit an unhealthy habit. However, you often need to show improvement for a year or more to benefit. A renewable policy may save you some money until you can qualify for a long-term policy.
For most other people, annual renewable policies with increasing premiums quickly become unaffordable compared to level term life insurance policies of equal value.
If you become ill, your annual renewable coverage could become too costly or you might become ineligible for the policy. With a traditional policy, your coverage cannot become more expensive or be canceled due to health changes as long as it remains active.
You can buy additional coverage and customizations — known as riders — for your annual renewable life insurance as you would for a traditional policy. Some riders are automatically included in your policy at no cost, while others may incur 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 access 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 to your beneficiaries if you die due to accidental bodily injury.
Child insurance: Child riders provide some coverage for your children without incurring 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 are unable to work.
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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 an independent insurance agent or broker to consider your options.
An annual renewable life insurance policy provides coverage for one year, after which you must renew it at a higher premium.
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. However, for most people, an annual policy is too expensive.
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 compare multiple insurers.