“Though least suggested, an annual renewable term insurance (ART) policy is sometimes worth it if fits your situation.”
What Is an Annual Renewable Term Insurance Policy?
A term life insurance policy is a scheduled life insurance program— you get protection for a particular period of time. The protection comes in the shape of a gross amount of money known as death benefit. Annual renewable term insurance policies are one option for you when you want such scheduled policies for protection.
There are two ways you can get the protection – for multiple years and for a single year.
Multiple year protection policies hold the safety umbrella over your head mostly for 6 periods or terms: 5, 10, 15, 20, 25 and 30 years. But a single year term policy does it for a date-on-date calendar year.
Both the multiple and the single year policies allow you to lengthen the protection through renewal. The difference is, while a 30 year term policy requires you to renew the policy once the 30th year passes, an annual renewable term insurance plan has you renew it every year.
Thus an annual renewable term life policy is a yearly policy that requires you to renew it if you choose to seek continued protection. It is also called yearly term policy or yearly renewable term policy.
Multiple Term Vs Yearly Term
The basic functionalities of both the multiple and annual term policies are the same.
There is the death benefit attached to all the policies. If you happen to pass on within the term, no matter single or multiple, your policy beneficiaries will receive the death benefit— the lump sum of money per the contract. All term insurance policies are renewable. Every term insurance plan terminates the renewal option once you reach a certain age, mostly in your 80s.
However, there are 3 fundamental differences between the policies.
An annual renewable term insurance policy converts soon after you sign up on it. Of course, conversion needs to meet the terms and conditions stated in the policy. Beneficiaries cannot claim to get any benefit if commit suicide.
But multiple year term insurance policies take time for conversion. It has you waiting for what is known as the ‘waiting period’. The typical waiting period consists of 24 months. However, accidental deaths within the period fall into exception.
Another huge difference is worth taking note of. The premiums of your policy, the costs that you pay to the insurer, go up each year if you are going to renew your annual renewable term insurance plan. But a multiple year term policy is a locked-in system. The cost remains unchanged till the periodic term is over. Costs increase only when you would want to renew the policy when it is over. This is why this policy is also known as level term insurance policy.
Besides the costs, the benefits of annual renewable term and the level term insurance policy may stand at great variance. Most companies won’t sell bigger death benefits through yearly term plans. For example, some companies may have a cap for how much death benefit you can buy.
A yearly term insurance policy’s biggest catch is the affordability it offers. The cost for a year can be extremely low. If you are in need of protection for less than 5 years, you can buy this. Once your unsafe years go off, you can cease to renew it.
With this policy, the medical tests are a one-time process. You need not take tests every year for renewal. No matter how your physical state is, you can keep renewing your policy till you reach the end year.
Besides, you can also convert the policy either to a level term policy or a whole life insurance plan as per the terms and conditions stated in the contract.
It is a pretty good way of protection for people who cannot be ‘decided’ with regard to their need for life insurance. So if you want life insurance for an interim step, an annual renewable term insurance policy can be considerable for you.
The Demerits of Annual Renewable Term Life Insurance to Note
However good an annual renewable term policy may sound, it is not a shirt without a seamy side. In fact, unless you are in the right situation, this is not for you at all.
First and foremost, there come the costs of the policy. The costs of level term insurance policies do not increase till the term ends. But with a yearly term policy, the costs keep going upward every single year. Compared to level term, you will be paying much higher through it if you continue it.
The biggest drawback of a yearly renewable term policy is the meager amount of death benefit that you can buy. Many companies sell up to only $50,000 through this product. So, this policy is less likely to be the right choice for you when have bigger financial burdens on your shoulder.
Also, an annual renewable term insurance policy is a failure when it comes to family protection. It may be fine for low mortgage or personal loans, but its low death benefit is not for your family. If you dependents behind to think about, a yearly term policy is a no-no.
Annual Renewable Term or Level Term?
You might wonder whether annual renewable term insurance is preferable to level term. The fact is there scarcely seem any reasons to suggest that yearly term insurance policy. But there are solid good reasons level term is the best choice.
Truly speaking, level term is the name for true financial planning that everyone should have. It allows you to financially organize yourself for longer periods with extremely low costs. If it is well-planned, (taken how much life insurance and how long you should buy it for into consideration) financial security of your family is 100% guaranteed. So, level is way far better for life insurance— you can call it the king of life insurance.
What about annual renewable term insurance policy then? Well— go for it when your need is not lengthy by any means— financial or temporal.