Annual Renewable Term Life Insurance: How It Works

Annual renewable term life insurance (ART) ensures coverage for a set number of years. With ART, you’re often insured for one year and may choose to renew your policy after your term ends. Out of other term life insurance options and whole life policies, ART is the least expensive form of life insurance available. This policy is suitable for those who may be looking for short-term life insurance coverage or are in between jobs and need coverage.

How Does Annual Renewable Term Insurance Work?

Annual renewable term insurance works like a traditional term life policy. At the time of application, you could assign a beneficiary who may receive your death benefit when you pass. Bear in mind that the policy must be active at the time of your death in order for your beneficiaries to get the death benefit. If you choose to not renew an ART and die, the policy may no longer be effective.

ART could be considered short-term life insurance as the policy has to be renewed every year for it to be effective. When you renew an ART policy, your death benefit and beneficiaries do not change, but your premiums may. 

Your original premium for your annual renewable term policy is based on your current age and how healthy you are at the time you apply. When you renew your annual renewable term policy, there is no need for a new medical exam. However, it’s important to keep in mind that your premiums will increase every year due to age.

Annual Renewable Term vs. Level Term Policies

Both annual renewable term and level insurance are similar in that they provide coverage for a set number of years and do not have cash value. The main difference between an ART and level term policies is the calculation of premiums. With level term policies, premiums are calculated through factors such as age, health, the policy amount, and policy length. Coverage for policy length ranges between 5-to-30 years. 

With an ART policy, premiums are determined based on how likely someone is to die within a year. This is beneficial for younger and healthier individuals because their rates may be lower. Unlike ART, in which the premiums increase annually, the premiums may remain level for the entire term length. 

Advantages of Annual Renewable Term Insurance

ART may be advantageous and provide coverage if you’re in between jobs, marriage, or if you’re in the process of improving your health.

Temporary Coverage Between Jobs or Marriage

ART may provide affordable and temporary coverage for you if you’re in between jobs or separation from your spouse. If you were listed as a dependent or shared life insurance with your ex-spouse, ART could be a cost-effective resource until you find something within your budget. 

Even if you do not have permanent life insurance, temporary coverage could help your loved ones financially, in the case that you do pass within a year from unforeseen circumstances. If you do find another life insurance policy that’s more suitable for you, you may choose to discontinue an ART policy after a year. 

Insurance While Improving Your Health

Your health and past medical records could be a factor in getting qualified for a life insurance policy. Insurance companies may look at your weight, medications, and other health diagnoses from your doctor to make sure you’re insurable. 

If you’re declined by an insurance company, ART could provide you coverage until you’re healthy enough to land affordable premiums with another type of life insurance policy, such as whole life insurance. This ensures that you may still protect your family from financial burden if you pass due to unforeseen circumstances. 

Disadvantages of Annual Renewable Term Insurance

Although there may be advantages to having an ART policy, there are disadvantages such as the cost over time. 

Cost Over Time

While ART is the most affordable type of life insurance, it could become more expensive over time. Bear in mind that when renewing an ART policy, your premiums are going to increase due to your age every year.

In the long-term, you’re going to be paying more than a level-term policy, where the premium is the same for 5 years or more.  

Who Should Get Annual Renewable Term Insurance?

Annual renewable term insurance may be beneficial for those who are in specific circumstances, such as going through job changes or waiting to get qualified for traditional life insurance.

Those Who Need Short-term Coverage

If you’re looking for affordable and short-term life insurance coverage without hurting your finances, you may consider an ART policy. For example, if your employer provided you with life insurance but you either lost or left your job, an annual renewable term insurance policy could provide you and your family with temporary coverage. 

Or, if you’re going through a divorce with your spouse and you share life insurance with them, ART could protect you temporarily. ART may be used short-term and you do not have to keep ART if you find a long-term policy that is financially suitable for you. 

Those Who Don’t Qualify for Traditional Life Insurance

Traditional life insurance may require a medical exam to insure you. During a medical exam, insurance companies may look at your health history, weight, and medications. If you do not meet the health requirements to qualify for traditional life insurance, you may consider an ART policy.

Tobacco users could get rated higher on their premiums for a traditional life policy compared to non-tobacco users. Once you’ve been smoke-free for 2-to-5 years, you could apply as a non-tobacco user for a traditional life policy. ART policies only consider your age and how likely you’re going to die in a year. Therefore, your family could still be financially protected if you were to pass.

Common Riders with Annual Renewable Term Insurance

Riders, also known as benefits, may be added to an annual renewable term policy. These riders give you additional coverage and features on the policy. Some riders are automatically added upon applying and some require an extra fee. 

Common riders include: 

• Spouse term rider: Provides additional life insurance for your spouse. 
• Child Rider: Provides additional life insurance for your children. 
• Accidental death: This rider pays an additional death benefit if you pass due to an accident. 
• Accelerated death benefit: This rider allows you to use part of your death benefit to help you with financial costs in the case that you’re diagnosed terminally ill. 
• Waiver of Premium: If you become disabled and can’t work, this rider waives your premiums on the policy.

When to Purchase an Annual Renewable Term Insurance Policy

The best time to purchase an ART policy is while you’re young and healthy so your premiums are low. For example, you could purchase a policy when you have graduated from school and are looking for a job that will provide benefits for you.

You may also purchase an ART policy when you need temporary coverage or may not be able to afford a traditional whole or term policy.