What happens to premiums for yearly renewable term insurance as an insured gets older?

Are you looking for a way to get life insurance without having to commit to a long-term policy?

If so, annual renewable term life insurance might be the right choice for you. This type of policy is designed to provide short-term coverage, and it can be renewed each year if you need it.

A yearly renewable term life insurance policy is a one-year term life insurance policy. This policy is in effect for the policyholders' purchasing year. When purchasing a yearly renewable term insurance policy, the premium is specified for a one-year term commencing in the current year.

To understand what annual renewable term insurance (ART) is, let’s look at the term itself. There are three keywords in it:

• Annual (meaning the policy lasts one year);
• Renewable (indicating you can renew the policy after it expires— which, by default, is one year); and
• Term life (that is, the policy lasts for a fixed period or term).

This means ART life insurance policy is a one-year term policy that you can renew at the end of each year. You do not need to submit proof of insurability to renew the policy.

Annual renewable insurance is relatively cheap, but your premiums will go up every year or after every few years because your mortality risk increases with age.

Given its affordability, an ART policy can be an attractive option when you are on a budget. But eventually, you may want to switch over to a traditional term life policy that lets you lock in low rates for 10-30 years.

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How does ART life insurance work?

With an annual renewable policy, the insurer sets your premium rate based on your current age, health status, and the preferred coverage amount. You are automatically eligible to renew the policy after one year without having to undergo a new health evaluation.

ART policies offer two main benefits:

• Premium wise, which is usually the cheapest life insurance policy option in the short run
• You do not need to answer health questions or take a medical exam to renew the policy

ART policies are cheaper than other term lengths initially, but eventually, turn out to be more expensive. As a result, it is an attractive short-term solution. An ART policy can make sense in certain situations:

• You lost your job and the group coverage along with it
• You are working in a high-risk job for a short period
• You want to cover a short-term debt
• You have recently quit smoking, but will not qualify for non-smoker rates for a couple of years
• You want a super cheap life insurance policy until you find a job with benefits

Even though an annual renewable insurance company is a good option sometimes, for most people a 10-30-year level term policy is likely to be cheaper in the long-run.

Now, you may be wondering: “What does level refer to in level term insurance?” Well, it simply means your premium will remain the same throughout the policy term. For example, buying a 20-year term policy early in your life allows you to lock in low rates for the next 20 years.

What affects the cost?

Your life insurance premium rate reflects the kind of risk you present to the insurer — that is, your chances of dying within the policy term. Insurers assess the risk of insuring you through a process called underwriting, in which they closely study your health and wellbeing. They reward young and healthy applicants with lower premiums.

In the case of an ATR policy, the insurance carrier bases your premium rate depending on how likely you are to die that year. This risk increases as you age or develop illnesses.

On the other hand, a traditional term life insurance policy sets your premiums on your age and health at the time of the purchase. That is why it is possible that a 40-year-old applicant might receive similar rates that they paid 15 years earlier. By contrast, a 45-year-old who sign-up for a renewable policy will pay considerably more.

Who should get an ART life insurance?

For most people, a traditional term policy is a better option thanks to its level premiums and stability. However, in certain situations an annual renewable policy could make sense, such as when:

• You cannot afford a regular term life insurance policy: Premium wise, ART life insurance is the least expensive option. So, if you have a strict budget, you may want to keep a renewable policy until your financial situation improves.
• You want coverage for a short period: Do you have a short-term loan that you want to cover? Then you can consider renewable term life insurance. Likewise, you may opt for such a policy if you are taking up a high-risk job for a short period.
• You are working hard to improve your habits or health: A Life insurance company might offer you standard rates if you give up a harmful habit, like smoking, or improve your overall health. However, you can qualify for lower rates only if you can show improvement for 12 months or more. Until then, a renewable term policy can be a good stop-gap arrangement.

The problem with the ART policy is that the monthly cost increases each year or every couple ofyears. As a result, most people may find it extremely difficult to afford it a few years down the line.  

How is ART different from term life insurance?

Both ART and other term life insurance policies are temporary in nature. Nevertheless, there are several key differences between them.

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Alternatives  

If you need life insurance for a very short-term, an ART policy may be a suitable option. For instance, if you need a life insurance policy to cover a short-term loan, you may consider buying an ART policy.

However, other life insurance policies offer a stable rate for a much longer period. For example, some insurance carriers offer five-year renewable term life insurance that is only slightly more expensive than a comparable ART policy. Such a policy lets you lock in low rates for five years as opposed to only one.

Having said that, longer-term life insurance coverages are likely to prove to be a better option for most people, especially if you purchase while you are young. You can lock in better rates for 30 years or even more. For example, the average monthly premium for a $250,000 life insurance policy for a 20-year-old may be as low as the cost of a large pizza!

If you want a life insurance policy without an end date, consider permanent life insurance. These policies last as long as you do, provided you pay premiums on time. Some permanent life policies include a savings component, giving you access to a tax-deferred fund that you can access during your lifetime.

How to buy ART?

Since not all Canadian insurers offer ART, your options may be limited. Nevertheless, you can count on Dundas Life to help you find the right insurer. Regardless of whether you want an ART life policy or a conventional term policy, we can help you gather multiple quotes so that you can quickly make an informed decision.

Conclusion

Annual renewable term insurance is a unique life insurance product. It provides coverage for one year, with the option to renew the policy at a higher premium. While most people may benefit from opting for a standard term life policy, an ART policy could make sense in certain situations.

Speak to a Dundas Life expert today to discuss which term policy will best suit your needs. We can help you find the best coverage at the best price.

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