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What is Annual Renewable Term – ART Insurance?
Annual Renewable Term (ART) insurance is a term life policy where the initial insurance contract is for one year. You can renew this life insurance coverage annually for a guaranteed number of years and receive a level death benefit. The policy’s premiums are reassessed once a year. Therefore, each year you are likely to pay more for annually renewable term insurance as you age.
The main reason for choosing annually renewable term life insurance is because you might need short-term life insurance fast.
When compared to other types of life insurance policies, such as level term insurance, ART is a far less common choice because most people don’t like the rising premiums each and every year. If you were to take out a lengthy ART insurance policy, you will pay more and more as you age, so it can be quite costly (as we will see below) if you have one in place for a substantial amount of time.
Understanding Annual Renewable Term Life Insurance
As you can guess, an annual renewable term is only available to those looking for a term life insurance policy.
There are some scenarios where an ART policy will work, but it all depends on your situation. If you are looking for long term coverage, you should consider other options.
At the very beginning of setting up an annual renewable term life insurance policy, you will lock in a period of ‘insurability’. Essentially, this means that you can lock down anywhere between five and 30 years, for which you can renew annually with no proof of insurability, i.e. no exam or medical questions. During this time frame, the premiums will be assessed annually and are likely to increase over time. However, you will not have to keep partaking in medical exams or reapplying each year.
ART Insurance, Level Term and Decreasing Term
You will find that there are generally three flavors of term life insurance: level, decreasing and ART insurance.
The first option, level term life insurance, typically allows the policy owner to lock into term lengths between 5 to 30 years. The policy premiums remain level for the life of the policy, i.e. the term. This is the most common form of term life insurance.
The second option, decreasing term life insurance, also provides a fixed premium and typically allows the same term length options as level term, but the face amount DECREASES over time. Decreasing term was a popular option for mortgage insurance because as you paid down the mortgage the policy face amount would drop similarly so that you don't pay for extra coverage you don't need. However, level term life premiums have adjusted so much that it typically costs the same for level term as it does for decreasing term, so decreasing term no longer makes sense.
And finally, we have the third option, annual renewable term insurance. So why do people choose ART insurance?
Lower Initial Premiums
At first, the premiums are low and this is what first attracts people to annual renewable term. However, they will rise with each year that passes because you will be older and your chance of passing away, statistically, will have increased.
Much like other types of insurance, the death benefit paid to the life insurance beneficiary will remain the same throughout the policy. As we mentioned above, that is not the case with decreasing term, where the face amount decreases over the policy's life.
Schedule of Premiums
Before we continue to look at the differences between ART and level term insurance, it should be noted that you will have a schedule of premiums for your policy. Above all else, this means that the insurer cannot increase your premium to whatever amount they fancy. As a chart from the insurance carrier, this will explain the maximum you can expect to pay each year so the insurer will never go above this amount, which removes the potential shock that can come from increased premiums.
Annual Renewable Term vs. Level Term Life Insurance
Within the marketplace, level term is the more popular of the two types of term life insurance. This is primarily because of one huge difference - with level term plans, your premiums will remain exactly the same year after year.
If you were to buy 30 year term life insurance, for example, your premiums will be the same in the last year as they were in the very first. With ART insurance plans, you will have seen many increases in the same time period so will be paying very different amounts at the end of your policy that that of the beginning.
Well, why would anyone choose ART over level term?’
Good question. However, there is a very simple answer - level term insurance plans are generally more expensive at first.
Overall, annual renewable term policies start cheaper than level term policies but they cross somewhere during the term and become more expensive.
Both policies typically give you the ability to add riders. Which ones you can add will be determined by the life insurance company.
Therefore, you need to weigh your options and see just how different the opening quotes are. If you only plan to have the policy in place for a short amount of time, you might find that ART works out cheaper than level term despite increasing every year.
Who Should Consider Annual Renewable Term Insurance?
Who should be looking towards this type of insurance? In truth, ART insurance should be considered by anyone who is looking for an immediate source of coverage as long as a longer form has been planned for the future or perhaps it isn't even required in the future.
For example, you may have a debt that you need covering just in case you were to die or maybe you need life insurance as part of a divorce decree. If this debt or financial obligation will be paid in just a few years, ART is a good idea because you will only remain covered for the time you need.
Furthermore, annual renewable term insurance can also be useful if you are set to undertake a dangerous job for a set period of time. For example, the policy can remain in place while your risk of death is high before being removed once everything returns back to normal.
Whatever reason you may have for short-term insurance, you need to remember that you don’t really want it for longer than a couple of years. Although you will enjoy the affordable and even cheap payments at the beginning, the increase each year will soon pin you down and take a significant portion of your disposable income.
ART Insurance Summary
As you can see from the information we have provided, there will be scenarios that ART really does work but it all depends on your unique circumstances. As we have said before, there isn't a universal answer or policy with life insurance that works for everyone. While some people are happy to take the medical examination, others want to avoid it at all costs. While some people only need coverage for a few years, others want it in place for life.
Therefore, the first thing you always need to do is assess your needs by asking "why do I need life insurance?" Whether you do it alone or with a professional, your needs are the most important first step you can take. Once you have this, you can decide whether or not annual renewable term insurance is right for you!
If you know ART or level term is right for you get a life insurance quote. If you prefer to speak with someone for more information give us a call and a life insurance agent can help guide you.