In the following article, in addition to explaining its main features and benefits of annual renewable term (ART), including why you may want to consider it, we will also explore the pros and cons of choosing annual renewable term, or ART insurance, and show a cost comparison with level term insurance.
Annual Renewable Term Definition
Before we go any deeper, let’s answer the main question that is likely to arrive from the introduction – ‘what does annual renewable term mean?’
DEFINITION of ‘Annual Renewable Term (ART) insurance’, a term life policy where the initial contract is for one year, that renews annually, and offers you guaranteed insurability for a set number of years, as well as a level death benefit. The policy’s premiums are reassessed once a year. Therefore, each year you are likely to pay more as you age. The main reason for choosing such a policy 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, this is an option only open to those who want a term life policy vs permanent life insurance.
With a permanent life insurance policy, it will remain in place until you die at which time the death benefit is paid. Also, the premiums may remain fixed until the very end. Since term life insurance is only for a set period of time, ART can only be utilized as temporary insurance.
However, it typically does offer a conversion option, which allows the policy to be converted to permanent coverage without proof of insurability (i.e. no life insurance exam needed).
Typically, you will be able to choose a period of time for which you wish to be insured starting with five or ten years. From here, you will find options in increments of five-year periods right up to 30 years, which is normally the maximum.
Because unlike cash value life insurance, there is no cash accumulation to term life insurance. The initial benefit is the premiums are generally much lower at first, which is why many younger generations choose term life insurance.
Additionally, having the option to go thirty years allows there to be a replacement for income or a coverage of debts should you pass away.
However, not all debts last for thirty years which is why some people choose to go down the annually renewable term route. In most cases, it will be to cover a mortgage, a transition between jobs, to cover a small business loan, or for occasions where a full life insurance policy isn’t required.
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.
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.
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.
Annual Renewable Term vs. 10 Year Level Term Life Insurance
Check out the following sample exam and no exam rates for 10 year term life insurance. Sample quotes are based on a preferred plus male as of February 2017 from A+ life insurance companies.
|20||13.92||9.62||18.27||13.13||24.5 (PP Only)||21.29|
|30||13.92||9.62||18.27||13.13||24.5 (PP Only)||21.29|
|40||16.25||11.71||23.75||18.20||29.75 (PP Only)||29.06|
|50||23.81||27.67||45.70||41.76||78.31 (PP Only)||75.51|
|60||68.32||60.13||127.32||112.83||227.55 (PP Only)||214.36|
Note: no exam one million dollar life insurance is available for preferred plus only
ART Insurance’s Similarities with Level Term
Earlier, we saw the main differences of Annual Renewable Term ART Insurance vs Level Term Life Insurance so we should also go through the similarities too so you can obtain the full picture.
First, the insurance will cover a set period of time and you will select at least one beneficiary during this time. Because the death benefit remains the same for both types of insurance, you will have to name at least one beneficiary who will receive the death benefit amount after you pass away.
Additionally, there may be an opportunity to add life insurance riders to your policy depending on which provider you choose. An accelerated death benefit is typically included with most carriers.
Other riders may also be beneficial. For example, you could add a disability waiver of premium rider which ensures that your premium is covered if you aren’t in a position to pay it yourself due to a disability or severe injury. With the option of having riders within your policy, you might have to pay a little more but you will have the added protection which can be useful.
Finally, there is normally a suicide exclusion placed on both level term and ART insurance policies. With this, it means that the death benefit will not be paid should the insured commit suicide within the first two years of the policy. If this were to happen, the premiums would typically be returned as opposed to the full death benefit and this is to protect the life insurance company.
Annual Renewable Term Insurance For Smokers
As well as working just fine for people who need short-term insurance for a particular event or to cover a cost that will soon be paid, there is another benefit of ART insurance and this is for the smoker looking for life insurance who is trying to give up the habit.
With regular insurance, you will find that you need to be one full year clean from cigarettes before you qualify as a non-smoker. If you didn’t know about ART insurance, you might put up with the higher premiums but these premiums will be in place for years to come.
If you were eight months without a cigarette, you might not want to pay much higher premiums considering you almost qualify for a non tobacco rate. Therefore, you can get an ART insurance policy to receive the cheap coverage before then reapplying as a non-smoker next year because, at this point, you would have cleared the twelve months of being clean rule. Rather than paying extra money for a ten-year policy, you can be classified as a non-smoker after just one year and this is a ‘sweet spot’ where ART really comes in handy.
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!
So, what are you waiting for? Give us a call today or visit our Term Life Insurance Quotes page and see what we can do for you!