Annual Renewable Term Life Insurance

Annual Renewable Term (ART) life insurance is described as a type of term life insurance that guarantees insurability for a set amount of years but the premium can be increased on a yearly basis. Annual Renewable Term is often purchased for short-term insurance needs.

Quick Navigation

What Is Annual Renewable Term Life Insurance?
Annual Renewable Term Life Insurance & Term Life Insurance Differences
Annual Renewable Term Sample Rates
Who Should Purchase Annual Renewable Term?
Is Annual Renewable Term Life Insurance Right For You?

Annual Renewable Term Life Insurance

What Is Annual Renewable Term Life Insurance?

Life Insurance SignBefore Level Term Life Insurance was introduced in the 1980’s, annual term insurance was the only game in town and was popular as a result. However, nowadays, most companies that offer level term, do not have an ART option. It’s just not as popular as it used to be.

One of the reasons for the decline in use just the stigma it carries. Annual term life insurance is seen as the “bait and switch” life insurance policy. The theory is that many agents have pushed it as a cheap alternative to consumers who don’t know any better. You receive a low teaser rate and get blindsided later on with a much higher premium.

Consumers also may buy it as a cheap alternative but years later not recall that the rate was supposed to go up. This is, unfortunately, a side effect of the “set and forget it” nature of the life insurance industry. When agents don’t communicate periodically with clients, clients often lose track of the original purpose of the policy.

Because of the lack of understanding and the miscommunication between agents and clients, Level Term Life Insurance has gained popularity. Its term is simple to understand and the policy stays level for a very long time before the prices increase.

Side Note: We strongly recommend using an independent insurance agent who is diligent about conducting annual reviews. If your current agent does not currently hold annual reviews, feel free to reach out to your insurance company and ask for a new “Agent on Record”.

Annual Renewable Term Life Insurance & Term Life Insurance Differences

Annual Renewable term is essentially the same as level term except that the premium is only level for 1 year.  It increases every year thereafter. It’s important to note that the increase is typically a gradual increase for the first 10 years. In many instances, the total over premium over the first 10 years will rival most 10-year term insurance options.

Chances are when someone speaks of Term Life Insurance, they’re usually referring to level term. Level Term is insurance that is guaranteed to be at a level premium for a set amount of time. Level Term comes in many different options usually 10, 15, 20, & 30-year terms.

In other words, if you purchase a 20-year term life insurance for $500 yearly premium, for the next 20 years your cost will stay level at $500/ year. What most people don’t realize is that for most companies, once that 20 year runs out, you are still eligible for insurance coverage for the 21st year and beyond.  However, the yearly rate will significantly increase every year thereafter. The increase is so significant that most people tend to either cancel their coverage or buy a brand new coverage.

Annual Renewable Term Sample Rates

Below is a sample ART policy for a 50-year-old male at “Standard Rate” looking for a $250,000 death benefit.

YearAgeYearly PremiumDeath Benefit
151$305.00$250,000.00
252$360.00$250,000.00
353$420.00$250,000.00
454$485.00$250,000.00
555$552.50$250,000.00
656$637.50$250,000.00
757$745.00$250,000.00
858$860.00$250,000.00
959$967.50$250,000.00
1060$1,090.00$250,000.00

The 10-year term equivalent is $647/ year, but this annual term insurance averages out to be about $642/year.

Who Should Purchase Annual Renewable Term?

Annual Renewable Term is often purchased for short-term insurance needs. Most Level term policies start at 10 years or more. Therefore if you have a 5-year need for life insurance, your best bet is to buy an ART and cancel after 5 years.

With that in mind here are the types of clients who should purchase this type of term insurance.

People Who Want To Maximize Cash Flow

We all know that ART is the cheapest form of life insurance initially and that is music to the ears of Cash flow kings out there. People who know how to manipulate their cash flow want to spend the least amount of money on everything so they have more money to invest.

The phrase “buy term and invest the difference” gets used by a lot of agents and advisors pushing Level Term Life Insurance, but for one to maximize their investment dollars, they should at least consider purchasing an Annual Renewable Term.

People Who Want To Ladder Their Term Life Insurance

One of the trendy topics amongst agents and advisors is a term life insurance ladder. It’s the process of buying multiple life insurance policies at different terms. The shorter term policy will have the highest death benefit while the longer term will have the lowest.

This goes hand in hand with our previous example of “buying term and investing the difference”. The thinking is that as you get older and you save more, you won’t need as much life insurance. Also, for people with kids, as they grow older, you will need less and less life insurance.

The easiest way to illustrate this is to use an example of buying life insurance solely to protect your mortgage.

Bob is a 40-year-old male who just entered a 30-year mortgage contract for $5,000,000. He wants to make sure that no matter what, his mortgage will be covered if he passes away. Most people in Bob’s situation would probably purchase a 30-year mortgage for $5,000,000. Bob would pay $5170/year for this policy. Since Bob’s mortgage will decrease as he gets older, he could try to ladder a few insurance policies to save some money. Let’s assume that Bob’s mortgage increases about $200k every 10 years. Here’s how he would structure his policies

  • 10-year term at $1400/ year  for a $5,000,000 death benefit
  • 20-year term at $1675/year  for a $3,000,000 death benefit
  • 30-year term at $1090/year  for a $1,000,000 death benefit

All this for a grand total of $4165 a year for the first 10 years, $2765 for the next 10 years and only $1090 for the last 10 years.

It’s important to note that these numbers work much better in favor of the Ladder life insurance when the death benefits and premiums are on the high side.

Where does ART fits into all of these? In the example above, Bob could buy an ART for the full death benefit and keep it for 5 years and reduce the 10-year death benefit to make his plan even more affordable.

Folks With Temporary Health Issues

Health issues might cause you to overpay for term life insurance. As an independent life insurance agency, we see many folks suffering from pre-existing medical conditions. While most people suffering from these might be able to qualify for life insurance eventually, insurance carriers want to make sure these people are in a stable condition.

Man and Woman with Annual Renewable Term Life InsuranceFor example, a breast cancer survivor might have to wait 5 years or more before they’re eligible for standard health rates. If this person could not afford the life insurance rates at the substandard rates, an alternative strategy would be to buy an ART at a much lower rate until they become eligible for a Standard health rating.

Who Should Stay Away From Annual Renewable Term Life Insurance?

There are several situations where you would not want to purchase an annual renewable insurance policy.

People Who Want To Set It And Forget It

Unfortunately for us life insurance agents, most people do not enjoy discussing life insurance. Most of our clients want to purchase the policy, store it somewhere and hope that their family will never need it. For these types of clients, level term might be a better option since they don’t want to get blindsided by a scheduled rate increase.

Many of the strategies mentioned above will indeed save you a lot of money if you follow through. However, most people are too busy or not interested enough to be diligent about saving money on their life insurance needs.

People Who Want To Be Prepared For The Unexpected

Life would be great if we could just plan it out on a piece of paper, calculate how much money we will need and live life according to these plans. Unfortunately, life throws us a bunch of curve balls and no matter how much we prepare, we can still get blindsided by the unexpected.

Let‘s use the above example of Bob using life insurance to protect his mortgage. It’s great for Bob to plan on how much insurance he would need, but what if he got laid off during the first 10 years and had to refinance. He would then have to purchase more insurance. Hopefully, he’d still be healthy to qualify for something close to the low rates.

Major illnesses are another factor that could derail these plans. If Bob suffers from a major illness during the first 10 years, he not only would have to refinance his mortgage but he might not be eligible to purchase more life insurance. Minimizing your death benefits work great as long as things stay the same.

Annual Renewable Term life insurance is an underrated and often forgotten about type of term life insurance. There are plenty of reasons why agents and consumer alike should consider purchasing these types of policies. However, due to the simplicity of Level Term Insurance, ART is not as popular because it’s not easy to grasp.

At the end of the day, people want to buy life insurance and put it away knowing that they have peace of mind, for at least a certain amount of time. ART is more for the consumer who is diligent about what they purchase and want to save every penny possible. For these types of people, it is probably still likely that they would have to combine their ART policies with a level term insurance coverage.