Many factors affect how long a consumer chooses to carry a term life policy. These might include their age, the price of the policy and the reason they are getting life insurance in the first place.
When you purchase a term life insurance policy, it is valid for a set amount of time. Usually, the price is also set throughout the lifetime of your policy. Typical term life policies can be anywhere from 10 to 30 years. Term options generally increase in increments of five years.
Consumers also have the opportunity to purchase a yearly renewable policy, or one-year level term and five-year term life insurance. While some companies offer annual renewable term, very few offer five-year term coverage.
Annual Renewable Term Life Coverage
Annual renewable term life insurance has a price increase yearly. Most term life insurance policies have the same premium for a considerable amount of time (called level term).
An annually renewable policy may initially be cheaper than a level-term life policy, but the price will increase yearly as the policyholder ages and renews their coverage. An annual renewable policy may make sense for your needs if you only need term life coverage for a short period of time.
Simply put, the premium goes up every year. It’s cheaper the first couple years than a say a 10, 15, 20 or 30-year term, but it will eclipse those level rates shortly.
In an annual renewable policy, instead of locking in a premium for a number of years, the premium is adjusted each year.
However, the contract can be locked in. An insurance company can offer customers a certain number of renewable years, where renewal will be automated at a set premium rate, although that rate will increase by the year.
To help customers understand what they’re signing up for, insurance carriers may offer a premium chart that will show how the rate will be increased each year, to be recalculated for the new risks of the insured individual being one more year older.
Why Would I Want a Yearly Renewable Policy?
One of the questions that shoppers might ask is this: being that you can get longer-term insurance without premium hikes, why would you want to take out a policy where you pay more each year?
One reason is that some shoppers are just thinking short-term. One of the most common situations is where the customer may not need term insurance for 20 years, because of job changes.
Say there’s a customer, let’s call him George, who is in between jobs. His last employer offered low premium group life insurance benefits because of his full-time status.
Right now he’s working part-time and doesn’t have any benefits, but he has some good job interviews lined up, and he knows that all of these companies will allow him to sign onto another lower premium group life insurance plan as part of their benefits packages.
Did you know that some lenders require you to carry a life insurance policy before they will give you a loan? This protects the bank in the event that you die and can no longer pay back the money you borrowed. If you are planning on getting a short-term loan of just a few years, an annual renewable term may end up being cheaper than a 10 year term.
It may also be a good idea to carry annual renewable coverage if you in a transition period of your life. For example, a medical student may want to purchase coverage just until they are finished with school.
Annual renewable policies are generally very inexpensive in the first few years of coverage when compared to longer-term life insurance policies.
A student that does not have much money can provide stability for his family in the event that he dies with this type of policy. Then he can upgrade to a 20 or 30-year term life policy once he enters a high-paying professional medical career upon graduation.
Annual Renewable Term for Smokers
Another use for an annual renewable policy is in the case of someone who plans to quit smoking. You can get a cheap smoker rate with an annual renewable term, and once you have quit for 12 months, buy a long term policy at a nonsmoker rate.
Five-Year Term Life Insurance Policies
Chances are you have never heard of a five-year term life policy. That is because most life insurance companies do not offer this type of coverage. Since there is not much competition in the five-year term life market, premiums for a five-year term policy generally are more expensive than a 10-year policy.
Five-year term life policies are offered for customers in unique situations like those that choose to take annual renewable policies. While the rates are higher, it may make sense for you personally to take a five-year policy instead of a 20-year one.
Costs of a Five Year Policy
If a five-year term policy is more expensive than a 10 year policy, I would not recommend that you buy a five-year term. Most of the time a 10-year term will be cheaper, and if you only need a policy for five years, compare the annual renewable term over a 5 year period with the price of a 10-year term.
You can always cancel the 10-year term policy after 5 years without any penalties if you don’t need the policy anymore.
In most cases, it is recommended that consumers consider a level-term policy for 10 years or more.
However, if your life insurance needs are shorter, an annually renewable policy may be the most affordable life insurance option that makes the most sense for your family.
Should You Buy Annually Renewable Term Life Insurance?
Life insurance shopping is more than just checking a couple of options. In the case of annual renewable policies, there’s no blanket recommendation that professionals can give. Each individual shopper needs to look at the full context of their own situation and what kinds of options carriers offer them.
That’s why it’s a good idea to get input from a professional insurance broker. These professionals understand the market and can help guide shoppers through their options to get the best coverage and premium rates available.
So ask an insurance broker to help you cut through the confusion and get your life insurance policy in a quick and easy way.
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