Life insurance is a crucial decision for everyone to consider. It’s also a very personal decision, as the individual has to think about the lives of their loved ones and plan for them to move forward without them.
A renewable term life insurance policy is a short-term option for those in significant life transitions or those needing coverage. The policyholder can renew the policy at the end of the term without going through the underwriting process again or taking another medical test.
- How Does Renewable Term Life Insurance Work?
- Why Renewable Term Life Insurance and Not Convertible Term Life Insurance?
- Advantages of Renewable Term Life Insurance
- Disadvantages of Renewable Term Insurance
- Who Should Consider Renewable Term Insurance?
- What to Look For in a Renewable Term Insurance Policy?
- What Happens at the End of a Renewable Term Insurance Policy
How Does Renewable Term Life Insurance Work?
A term life insurance policy is a policy that gives the insured a death benefit for the course of their policy’s term, which can be anywhere from one year to 20+ years, depending on what the insured selects when signing up for coverage. Adding a renewable clause changes a term policy into a renewable term policy, effectively bypassing the insured’s need to requalify for the policy or go through the underwriting process again at renewal.
Policyholders can also choose between a renewable term policy and an annual renewable term policy. The only difference between the two is that the annual policy renews yearly, whereas the regular policy renews after a longer term. The standard renewable term also gives the policyholder a slightly higher rate for an extended time, but the premium holds steady for the entire initial term.
Why Renewable Term Life Insurance and Not Convertible Term Life Insurance?
A policyholder who wants to execute the renewable or convertible clauses can do so without taking a medical exam or underwriting. The way they affect the policy once implemented is vital to note. A renewable term policy provides the same coverage without requiring a medical exam for the following term. A convertible term policy offers an additional option to change the term policy to a whole or universal policy without a medical examination.
Adding the option to convert a term policy tends to be more expensive than traditional or renewable term policies. The premium will increase again if the policyholder decides to switch to a whole or universal policy. The option to change the policy type from convertible to a whole or universal, similar to the opportunity with a renewable term policy, is available. The policyholder can switch either during the policy term or before they reach the maximum age to convert this policy type, whichever comes first.
Advantages of Renewable Term Life Insurance
There are several advantages to this policy type, mainly concerning the ease and flexibility for insureds. Further breakdown of the benefits are as follows:
- Easily renewable: The policy can be renewed without a medical exam and without redoing the underwriting process when the term expires.
- Flexible: An insured can set this policy term anywhere from one year to 20+ years without resubmitting a medical exam.
- Initially Affordable: Young and healthy recipients are guaranteed maximum coverage for the lowest price.
- Temporary: A renewable term policy is optimal if you need short-term coverage for outstanding debt while traveling abroad or for additional protection through the unpredictability of day-to-day living.
Disadvantages of Renewable Term Insurance
The disadvantages of this type of policy are mainly surrounding the premium increase at renewal. While affordable when the insured is younger, the price can change drastically from term period to term period. At a particular price point, this type of policy becomes the more expensive yet less beneficial option, which the policyholder will have to consider around renewal time. Once they reach a particular age, this policy is out of reach entirely. Few other disadvantages can include:
- Expensive at renewal: The price for the policy goes up at each renewal term
- Non-Convertible: you can’t switch the policy type during your term unless you have included that rider
- Only renewable to a predetermined age: The maximum age that an insured can be to renew their policy varies from state to state but is usually around 70 or 80 years old
- Doesn’t build cash value: an insured signs up for a set policy amount that doesn’t change over the term, and once the policy has expired, the insured loses access to the death benefit amount.
- It doesn’t last for life: this policy only lasts as long as the term that the insured has preselected.
Who Should Consider Renewable Term Insurance?
Because a renewable policy’s flexibility could be the best option for a wide range of insureds, the following people could benefit the most from a renewable term life policy:
- Policyholders with medical conditions that surfaced during the current term that could exclude them from other policies.
- Policyholders who need a short-term, flexible policy.
- Healthy, young people who need protection against unforeseen life events.
- Policyholders who are in life transitions, like marriage or divorce, and whose lives are therefore too turbulent to insure under a more permanent policy.
- Insureds who can’t qualify for a new policy because of their age.
What to Look For in a Renewable Term Insurance Policy?
Consider the length of the term period and your goals for the policy when shopping for a renewable term policy. For example, a parent may consider a renewable term life policy while their child is younger and select a term length that will continue for them through high school or college. That way, if the policy outlasts the policyholder, their kids will be able to finish school, and their family won’t have to sell their home.
It’s also important to consider the premium when picking a renewable policy. How insurance companies weigh different aspects of their policies is unique to each company. Shopping around will get an insured the best premium possible.
What Happens at the End of a Renewable Term Insurance Policy
One thing to note about the death benefits is that if the insured survives the length of the policy, the policyholder loses the death benefits. This type of policy pays out like any other insurance policy: the coverage is there while the policy is active, but it’s gone once the term is over unless it is renewed.
Towards the end of the term, the insurance company will inform the policyholder that their term is ending. As long as the insured is under the maximum age limit and is considering renewing the policy, the insurance company will send a letter with the new premium amount. At that time, the insured can review the documents and decide if they would like to keep the policy in place with the updated premium or if they would like to cancel the policy and shop around for a better rate or more suitable option.