Understanding Annual Renewable Term Life Insurance (ART): Features and Benefits

Annual renewable term life insurance is short-term life insurance that provides coverage for a specific period of time; in this case, for one year. One year term life products are designed to protect you on short term needs or situations. This could include mortgage protection, temporary financial obligations and many other reasons.

In simple terms, ART is structured like a regular term life policy by covering needs defined by the customer with level premiums over a fixed period of time. At the end of the term, the insurance is no longer in effect unless the policyholder decides to continue coverage on a renewable term policy.

As with any level term life insurance product, there is no cash value associated with annual renewable term life insurance. Premiums pay for the insurance coverage and life insurance company fees.

If the policyholder decides to renew, the insurance company will reevaluate the policyholder and determine if the rate should be changed. This is very similar to how insurance companies handle longer term life insurance policies.

Insurance companies evaluate potential policyholders in ways similar to how they underwrite policies for longer term life insurance. They will look at factors such as age, health, occupation and many other factors to determine the premium amount.

At the end of the year, the policyholder has the option to renew the policy or drop the coverage. Like a longer-term policy, ART premium rates will likely rise on each renewal period because the policyholder is getting older, and new issues often arise that lead the insurance company to believe its risk has increased.

This renewal process can continue on as long as the insurance company is willing to accept the risk. However, it is likely over an extended period of time, five to 10 years or more, that the policyholder will experience significantly higher premiums.

There is a limit based on age on how long an ART can be renewed, and it varies by state. In New York, for example, the age limit is 80.

There are reasons why ART might be a good fit for your life insurance needs and reasons why it might not be the best fit. Let’s look at the pros and cons.

Advantages and Benefits of Annual Renewable Term Life Insurance

Annual renewable term life insurance fills a need for individuals or businesses looking for a short-term solution based on issues that often have arisen unexpectedly.

• Temporary coverage. Annual renewable term life insurance might be a good fit for families or businesses who need short-term coverage for an important issue. For families, it might be the last year or two of a child’s college education they want to ensure is covered in the event of the policyholder’s death. For businesses, it could be ensuring business continuity in the event of the loss of a business owner or business partner.
• Affordable for the short term. In many situations, ART can be a very cost-effective solution to a short-term problem. It’s not unusual for premiums to be low in the first few years, assuming the policyholder renews annually. However, premiums can go up significantly if ART is used as a substitute for longer term life insurance.
• Convertible. Some ART policies can be converted to one or more types of permanent insurance. You should speak with a licensed agent about these scenarios.

Annual renewable term life insurance can be an excellent solution to a temporary problem or issue.

Considerations and Limitations of Annual Renewable Term Life

Like any life insurance plan, no one product can meet the needs of everyone. Annual renewable term life insurance has become a popular product to fill unique short-term needs of policyholders, but it has its limitations.

• Increasing premiums. Insurance companies work to manage the risk they take on when issuing a life insurance policy. In the case of ART, they often start new policyholders at competitive rates, assuming there are no significant issues with the application. But as the policyholder ages, the cost of coverage will increase.
• Limited customization. What you see is basically what you get with ART: term life insurance for a one-year period with a level premium. There is the ability in some cases to add riders to an ART policy.
• No cash value. Unlike permanent life insurance, there is no cash value associated with annual renewable term life insurance. The premiums you pay cover the cost of insurance only.
• Short term only. If your coverage needs are more long term, then this probably isn’t the type of policy for you.

If you are considering a short-term insurance solution like ART, we recommend you speak with a financial advisor or licensed insurance agent to make sure you understand the issues with this type of policy.

Riders can be a way to add additional coverage for specific needs. Here are a few of the most popular riders:

• Accelerated death benefit. This allows the policyholder to access a portion of the death benefit if they are diagnosed with a terminal illness.
• Waiver of premium. If the policyholder becomes disabled and unable to work, this rider waives the premium payments while keeping the coverage in force.
• Conversion. There is an option in some cases to convert the annual renewable term life insurance policy to a permanent life insurance policy without additional underwriting. Check with your insurance agent for details.

As with any life insurance, the best riders depend on your individual needs and budget.

These two types of life insurance are at opposite ends of the spectrum. Annual renewable term life insurance is a product designed to meet needs over a short period with level premiums and no cash value during its one-year term. ART requires annual renewals for the policy to remain active. Permanent life insurance is designed for lifetime protection with several types of coverage from whole life insurance to universal life insurance that build cash value in a variety of ways. Permanent insurance is often an important component of estate planning.

These two types of term life insurance are very similar. The only significant difference is that traditional term life insurance is designed for longer periods of time, typically a 10-, 20- or 30-year term. Some insurers will go up to 40 years.

Life insurance in general is a flexible financial and estate planning tool, with many features and options. And, yes, at times all the options can be confusing.

Annual renewable term life insurance is designed to meet short-term needs and situations. When used for a number of years it can become expensive — often more than you might have paid for longer term life insurance coverage.

But ART can be a good fit for many different needs:

• Parents with dependent children. The focus is on protecting the child for the years until they move out of the home.
• Student loans. Many students attempt to pay down loans quickly, but during that time ART can be used to cover that cost in the event of the policyholder’s death.
• Business startups. The early years of most young businesses are littered with startup and operational costs and business loans before the business becomes profitable. Having an ART can help secure loans and provide for business continuity funding.
• Key person protection for businesses. ARTs are used as protection for the business in the event of an important person such as a key employee or business owner passing away.
• Debt repayment. A common use of an annual renewable term life insurance policy is protecting heirs from the burden of loans and credit card debt.
• In between jobs. ART can be an effective bridge when an individual is in between jobs and is planning to take group life insurance coverage with their next employer.

Annual renewable term life insurance can be an effective way to manage short-term personal business issues and concerns. There are also many other types of term insurance that can be used for these situations. The best life insurance for you will depend on your goals, how long you require protection and various other factors.