Annual renewable term life insurance is temporary coverage until you can afford a longer-term option

Personal Finance Insider writes about products, strategies, and tips to help you make smart decisions with your money. We may receive a small commission from our partners, like American Express, but our reporting and recommendations are always independent and objective.

  • Annual renewable insurance is a term life insurance policy.
  • Annual renewable insurance is relatively cheap, but renews each year and becomes more expensive as you age.
  • It's short-term coverage that can be useful in a pinch, but eventually you should switch to a traditional term life insurance policy.
  • Policygenius can help you compare life insurance policies to find the right coverage for you, at the right price »

The goal of having life insurance is to ease the burden on your loved ones after you die. Your life insurance payout can cover the mortgage, education, and other expenses so your family can continue paying the bills. 

Traditional term life insurance policies have a time frame of 10, 20, or 30 years. But if your sole life insurance is group life insurance from your employer, you lose coverage if you resign, retire, or are discharged before the term is up.

If you're in between coverage, or you don't qualify for traditional life insurance, short-term life insurance through an annual renewal term policy is an option.

What is life insurance?

Life insurance is a contract between you and the life insurance company where you pay premiums (monthly or annually) for a payout that your living relatives will receive, known as the death benefit. Should you die, the insurance company pays the death benefit to your chosen beneficiary.

"If you don't make it home and someone relies on your income to live, you need life insurance," Mark Williams, CEO of Brokers International, told Business Insider.

There are two types of life insurance: whole (permanent) life and term life. Whole life insurance lasts the rest of your life, but it's significantly more expensive because in addition to a death benefit, it has a cash value component that you can borrow against during your lifetime.

Term life insurance covers a set time period only, usually 10 to 30 years. If you die during that period, your beneficiaries get your death benefit. Term life is the type most often recommended to healthy people with dependents because of its relatively low cost.

Annual renewable life insurance is term life insurance.

Annual renewable term life insurance is short-term coverage

Annual renewable term life insurance is short-term coverage. A one-year policy is relatively cheap compared to a traditional term life policy.

Traditional term life insurance covers a 10, 20, or 30-year period and the monthly payment remains the same throughout the entire term. Annual renewable life insurance does not work like that. It is renewed at the end of each year, and your premium usually increases as you age. Although your premium may increase each year based on your age, you will not have to have a medical exam every time you renew, according to Fidelity Life.

Who needs annual renewable term life insurance?

You may want to consider annual renewable term life insurance if you:

  • Do not qualify for a traditional life insurance
  • Want coverage for an abbreviated period of time
  • Are opening a business with a business partner, and want to cover any startup debt
  • Are divorced, pay child support, and want to insure yourself for those payments
  • Are in the process of quitting smoking, when it may be the cheaper option until you qualify for non-smoker rates on traditional term life insurance

Annual renewable life insurance gets more expensive over time

Fidelity notes that annual renewable policies are best suited for younger adults in good health because the risk of dying is lower, so the rates will initially be cheaper than a traditional life insurance policy. However, as you age, the premium rates go up. That's when you should consider a traditional term life policy for 10, 20, or 30 years.

Remember that annual renewable term life insurance is supposed to be short-term coverage. Eventually, you should switch to a traditional term life policy because you will ultimately end up paying more for a renewable term life policy than for a traditional term life policy.

According to Insurance Geek, a 36-year-old non-smoking male can get a renewable term for $140 a year when a 10-year term life policy would cost $170 a year. However, within four years, the renewal policy premium becomes more expensive than the 10-year term life policy. 

Because renewable life insurance is annual, it is harder to get online quotes to compare your options. Most online portals will refer you to an agent or redirect you to a traditional term life policy quote. Therefore, getting renewable life insurance will require a bit more research than a traditional life insurance policy. As always when shopping for insurance, make sure to get multiple quotes to find the best affordable coverage for you.

Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.

Source: Read Full Article