If you have been spending some time looking at all the various life insurance policies from the best life insurance companies – you know how challenging it can be. Finding a policy that works best for you and your loved ones is sometimes difficult. Whether you are looking for insurance for a lifetime or a policy to cover one aspect of your life- such as your mortgage, there are so many to choose from. Today, we’re going to address Annual Renewable Term vs Level Term. We’re going to cover this short-term life insurance option as well as its advantages and disadvantages. Let’s get started!
Definition of Annual Renewable Term life insurance
Annual Renewable Term insurance (also known as ART) is a one-year term life policy the renews each year. ART guarantees coverage for a certain number of years as well as a level death benefit. The policy’s premium is reassessed each year and therefore it’s highly probable you will pay more as you start aging. Choosing this policy option is usually for those who want short-term life insurance right way.
Definition of Level Term life insurance
With level term life insurance, you’ll receive the policy’s coverage amount for a specified period of time (the term). You will pay the same premium over this time period (level premium).
The most common term lengths are:
Your policy is in force, or active- just as long as you pay your scheduled premiums until your term life policy ends.
Should I choose ART over Level Term?
In a nutshell, level term insurance is more expensive in the beginning. While annual renewable term starts off a great deal cheaper- as these policies move forward in time, those premium figures will switch places. Annual Renewable Term will cost you more over the long-haul.
It’s advisable that you weigh all your options and understand the differences in the initial quotes. If you only need a short-term policy for a short period of time- Annual Renewable Term might be the best choice as it is cheaper in the beginning.
Understanding Annual Renewable Term Life Insurance
In comparison to other life insurance policies, Annual Renewable is not a very popular policy. Why… because no one wants to pay for the increased premium every year. If you choose Annual Renewable Term, you will continually pay more each year. This can become quite expensive over time.
How does annual renewable term life insurance work?
The option for Annual Renewable Term Life Insurance is only available for those who want a term life policy instead of a permanent life insurance policy. Permanent life insurance will stay in place for your entire life until you die. After you pass away the death benefit is paid out. Also, the premiums may remain fixed until the end of the policy. Term life insurance is set up only for a certain period of time Annual Renewable Term can only be used as a temporary insurance policy.
Pros of annual renewable term life insurance
One of the main advantages of ART is that the initial premium is typically lower. The reason is it’s only providing coverage for 1 year. Another advantage is that ART typically provides the option to convert to a permanent coverage without a life insurance exam.
You will be able to choose a period of time for coverage starting with either five or ten years. Afterward, you will have options in increments of 5 years up to 30 years. This is usually the maximum period of time.
Cons of annual renewable term life insurance
The major disadvantage of ART is that the premiums raise each year. Another disadvantage is that term life insurance, unlike cash value life insurance, does not have a cash accumulation. The benefit for term life is the premium is much lower and is very popular with younger people. Also, you usually have the option to extend to thirty years for the replacement for income- or to cover debts if you pass away.
That said, not all debts will last for 30 years. This is why some people will choose the annual renewable term option. In many cases, it will be used to cover a mortgage, a transition in jobs, cover a small business loan, or for other reasons. It often used when a full life insurance policy is not needed.
Period Of Insurability
When you first set up an annual renewable term life insurance policy- you will lock in a certain period of insurability. In other words, you are locking down anywhere from 5 to 30 years that you can renew yearly. You can do this without requiring a medical exam or answering medical questions.
Typically during that time frame, the premium will be assessed yearly and more than likely will increase over time. The upside, you do not have to reapply each year and never have a medical exam.
Three Options Of Term Life Insurance
In general, there are three options for term life insurance, level, decreasing, and annual renewable term. Let’s take a look at the breakdown:
1. Level Term Life Insurance
This allows the policy owner to lock their premium into a period of time. It could be from 5 to 30 years. The policy premiums will stay level for the life of the policy.
2. Decreasing Life Insurance
This is also a fixed premium and provides the same term length as a level term- but the face amount decreases over time! Decreasing term life was a popular option for mortgage insurance because as you paid on your mortgage, the policy’s face amount would continue to drop. This is a great benefit so you are not paying for added coverage you don’t need. Nowadays, level term premiums have significantly adjusted and typically costs the same as decreasing term. Therefore, decreasing term life just is not as practical anymore.
3. Annual Renewable Term
As mentioned earlier, ART is usually chosen for a short-term life that is needed now. It’s often chosen to cover a mortgage or job changes. It can be used for reasons that a full life insurance is not needed for.
Why Would I Choose Annual Renewable Term Insurance?
Let’s look at why you would want an annual renewable term life policy.
1. Initial Premiums Are Lower
A lower initial premium is one of the leading factors to attract people to ART. That said, you should understand that each year, this policy will be reassessed and will increase as you age. Like other insurance policies- the death benefit is paid to the life insurance beneficiaries and remains the same throughout the policy. Unlike decreasing term, the amount does not drop over the life of the policy.
2. Schedule of Premiums
You should take note, you will have a schedule of premiums for your policy. This means that the insurance company cannot increase your premium to whatever they choose. You should have access to the insurance company’s chart that explains the maximum you can expect to pay each year and cannot ever go above that amount.
3. Annual Renewable Term In Comparison To Level Term
In the term life insurance marketplace, the level term is more popular than the annual renewable term. The biggest reason is level term premiums will remain the same throughout the life of the policy.
For instance, if you purchased a 30-year term life policy- your premiums will stay the same from the first year to the last year. If you were to choose the annual renewable term- you will see many increases over the same period of time and will be paying much more by the end of the policy.
Who Should Consider Annual Renewable Term Insurance?
The best candidates for annual renewable term insurance are people who need immediate coverage for a shorter period of time. Long-term coverage will be planned in the future. It’s also good for those who have long-term life insurance in place but want a short-term for things such as for the mortgage.
You might have a debt that you want to be covered should you pass away- or is needed as a part of a divorce settlement. What if you have a debt that will be paid off in a few years? An annual renewable term insurance might be a very good idea.
Other people who might want an annual renewable term insurance are those who are involved in high-risk jobs for a certain period of time. The policy will remain in place while they are performing a dangerous job– but will be removed once their lives return to normal.
Whatever reason you might have for a short term insurance, keep in mind, you do not want to keep it more than for a couple of years. The longer you keep this short-term policy, your payments will continually increase each year. Before you know it, you will be paying out a very significant amount of money for this policy.
Similarities between Level Term and Annual Renewable Term
Now that we have gone over the differences between these two term insurances, let’s look at their similarities.
There is a set period of time for both and you can choose at least one beneficiary during that time. As the death benefit stays the same for both- you will have to name at least one beneficiary to receive the death benefit should you pass away.
What About Riders?
Also, you will have options to add life insurance riders to your policy, depending on the insurance company you choose. An accelerated death benefit is usually included with most insurance carriers. This allows you access to your death benefit before you die.
There are other riders that might be something that will work for you. There is a disability waiver of premium rider. This will make sure your premium is covered should something were to happen and you couldn’t pay for it. If you were to become ill, suffer a serious injury and/or become disabled, this could be a very beneficial rider. Although you might have to pay a little extra for riders- you will have added protection that can come in handy somewhere down the road.
Keep in mind, most insurance companies have suicide exclusions placed on both level term and Annual Renewable Term policies that are in place to protect the insurance company. This means that a death benefit will not be paid should the insured commit suicide within the first 2 years of coverage. Should the insured commit suicide, the premium would be returned but the full death benefit will not.
ART Insurance For Smokers
Annual renewable term insurance is an excellent option for short-term insurance to cover the cost for a particular situation and can be beneficial for smokers looking for life insurance coverage. Regular insurance usually demands that you are a non-smoker for one year to qualify for insurance. With annual renewable term insurance, you will have to pay a higher premium but will be in place for many years to come.
If you have been a non-smoker for some time, you really don’t want to pay a higher premium because you a very close to qualifying for a non-smoker’s rate. You might want to look into the annual renewable term policy in order to get a cheaper coverage before you can reapply for a non-smoker status next year. Normally, you will have to be clean of smoking for 12 months so instead of paying a lot of extra money for a 10-year policy as a non-smoker, you can qualify after just one year with an annual renewable term life making this a really good alternative.
How much coverage do you need?
It will depend on a variety of factors unique to you – but please refer to our needs analysis page for an easy calculation. With the information we have provided, you can see how annual renewable term might work really well for a given situation you want to take care of.
It depends on your circumstance and whether this short-term insurance might be just what you are looking for. As we have said so many times before, there is no one size fits all when it comes to life insurance. For instance, there are people who have no issues with taking a medical exam while others will run for the hills! Some people only need coverage for a few years while other need insurance for life.
How to get the most affordable policy for you
Before deciding what life insurance is best suited to your needs, you have to ask yourself what you need life insurance for. Whether you want to do this on your own or get with a professional agent, it’s the most important first step you will take. Once you have assessed what you need from life insurance, you can decide which policy, including annual renewable term insurance, is best for you. Annual renewable term life insurance might just be something that will work out really well for you over a short period of time.
Annual Renewable Term vs Level Term
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