Most term life insurance policies are offered in lengths ranging from 10 to 30 years. But there is also an option that enables you to purchase coverage in one-year increments.
Annual renewable term (ART) life insurance is a type of short-term policy that provides coverage for one year, with the option of renewing the policy annually.
ART is similar to level term insurance with one key difference:
Whereas level term charges the same premium amount for the full length of the term period, ART premiums will increase over time.
Though you have to renew ART coverage each year, contracts guarantee you a period of insurability. This is the length of time you can renew the policy on an annual basis without going through the application and underwriting process. This period typically ranges from 10 to 30 years, provided you pay your premiums on time.
ART periods are subject to a maximum age limit. In some states, insurers can not renew ART policies beyond age 75 or 80. Otherwise, your annual renewable term life insurance policy automatically renews when you pay the premium due.
The premiums for ART policies start out lower than comparable level term policies. This makes them an attractive option for short-term insurance needs. Each year you renew, the premium will increase while the death benefit amount stays the same.
If you think of buying a 30-year level term policy as getting a 30-year fixed-rate mortgage on your house, ART is somewhat equivalent to getting an adjustable rate mortgage (ARM). In exchange for getting a lower rate in the early years of the contract, you pay more later. You also have the option of exchanging your ART for a level term policy, but you will have to go through the underwriting process again.
When you are issued an ART, you receive a premium schedule chart that shows the maximum premium the insurance company will charge at each annual renewal. The actual premium you will pay will be communicated to you at the time of each renewal. The longer you keep an ART and renew it, the more it will cost.
In most cases, medical professionals will likely prefer a level term policy with a guaranteed premium amount. Some people opt for an ART when they have a short-term need for life insurance. In these situations, the ART provides cheaper coverage and the flexibility to maintain the coverage until they no longer need it.
For example, it could be used in scenarios where a physician borrows funds to start their own practice. The life insurance coverage could help in case the insured passes away before the business loan is repaid, giving the physician’s estate or business partners the ability to cover the loan balance. Once the loan is paid in full, the insured can choose not to renew the ART policy.
ART also has some longer term uses. For example, it could be an option for residents who want to save on term life insurance until they begin their practice. Since the initial premium would be less expensive, it could make it easier for residents to fit the cost into their budget. Then as they make more money, they can afford to pay higher premiums.
The lower initial premiums on an ART can also free up cash you can use to pay down student loan debt or for other purposes.
To determine whether an ART may be a better deal over a given period, you will need to determine how long ART premiums will remain less expensive than comparable level term premiums.
For example, in one hypothetical scenario, the premium for an ART would be lower than a 20-year level term policy for the first 10 years. The cumulative premiums you pay on an ART may not surpass those of the 20-year level term until, say, year 17. That means if you held onto coverage for 15 years, you will have paid less in premium with the ART than with buying a 20-year policy that you cancelled after 15 years.
On the other hand, if the insurance company raises premiums higher than what is on the premium schedule, you may end up paying more for ART after 12 to 15 years.
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Joel Palmer is a writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.