Annual renewable life insurance (ART) works just like other kinds of term life insurance — except you have to renew your policy at a higher premium each year. By comparison, traditional term life insurance policies usually last 10 to 30 years — called the term — and have level premiums, meaning they don’t change.
Annually renewable term insurance is best for short-term life insurance needs because it eventually becomes more expensive than a comparable level term life insurance policy.
What is renewable term life insurance?
Renewable term life insurance is a type of policy that lets you extend the coverage at the end of your term. This allows you to keep coverage without applying for a new policy or taking another medical exam.
Many level term life policies come with the option to renew your policy on an annual basis at the end of the initial term, up until a certain age, usually between 85 and 95.
Even if you have a level term policy that’s guaranteed renewable up until age 95, for example, your premiums increase every year after your initial term and can become very expensive.
Annual renewable term is a common type of renewable life insurance, but not all renewable life insurance policies are limited to an initial term of one year.
How does annually renewable term insurance work?
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 payout from the insurance company — called the death benefit.
Traditional term life insurance policies usually have guaranteed level premiums, meaning that your payments stay the same throughout your entire term.
Your premiums can only go up if you let your policy lapse and need to buy a new one, or your insurer lets you change the coverage amount on your existing policy.
Initially, annual renewable insurance rates are often lower than what you’d pay for a similar traditional term life policy. However, the rates go up every year. They’ll eventually be much higher than rates for a guaranteed level policy.
ART policies vs. level term life insurance
An ART policy works the same way as level term life insurance — the only difference is how long the policy lasts.
ART renews each year you own the policy. If you choose to renew, you’ll pay a different, higher premium each year.
Level term life insurance maintains the same premiums for the entire length of the term — often 10, 20, or 30 years. Level term life insurance is usually renewable, but you don’t have to renew it until the end of the term.
What affects the cost of annual renewable term life insurance?
Like other types of life insurance, your age, gender, health, and lifestyle factors affect the cost of annual renewable term life premiums.
Life insurance premiums reflect how risky it is for the insurer to cover you based on your estimated lifespan and the length of your term.
The younger and healthier you are, the lower your premiums will be.
The shorter your term, the lower your premiums will be, too.
For annually renewable term life insurance policies, the insurance company calculates your premium based on the risk that you’ll die during that particular 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 with a 20-year term, while a 40-year-old with an annually renewable policy would pay significantly more.
Pros of annually renewable term life insurance
Annually renewable term life insurance is generally cheaper than other types of coverage during the first few years the policy is active, and you get to decide how many years you keep your policy.
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 a habit like smoking. 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.
Cons of annually renewable term life insurance
For most other people, a level term life insurance policy is a better value than an annually renewable one.
Over time, you’ll pay more for an annually renewable policy than you would for a level term policy with the same coverage.
If you get sick, you might become ineligible for the policy. Even if you still qualify, your premiums could become too costly. With a traditional policy, your coverage can’t become more expensive or be canceled due to health changes as long as it remains active.
You can also cancel your level term policy if you find you no longer need coverage before the end of your term. You can still control how many years your policy remains active, even if you don’t buy an annual renewable policy.
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 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.
Child insurance: Child riders provide coverage for your children without the high costs of a standalone child life insurance policy.
Spousal insurance: A spousal rider adds some coverage for your spouse to your policy, which can be useful if they don’t qualify for an individual policy.
Waiver of premium: This rider waives your premiums if you become disabled and can’t work.
Conversion rider: This feature allows you to convert your term life policy into a permanent policy at the end of the term. Many insurance companies include this feature for free.
Is annually renewable life insurance worth it?
ART policies are best used for specific short-term life insurance needs. For many people, a traditional term life insurance policy offers cheaper premiums long-term and simpler coverage that doesn’t require yearly renewals.
If you think an annually renewable policy is right for you, you can speak with a Policygenius agent to go over your options and compare top-rated insurers in one spot.