Term life insurance is often the best choice for families: It’s comprehensive, affordable, and provides several options to maintain coverage when your initial term ends. Here, we examine one of those options.
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So, what happens after your term life policy ends? Renewable term life insurance (sometimes called Annual Renewable Term Life Insurance or ART) is one option provided by life insurance companies that lets you to maintain coverage after the term of your original policy has finished.
Let’s see how it works…
Renewable Term Life Insurance: The Advantages and Disadvantages
Just because your term life insurance comes to an end, doesn’t mean you won’t have coverage. You can renew your term life insurance, but before you dive, it’s important to know some of the pros and cons.
- Allows you to reclaim your coverage at the end of your initial term.
- Allows you to keep the original face value amount (or death benefit) of your first policy.
- Permits you to renew your term life policy without having to start the application process again.
- Exempts you from answering medical questions or undergoing a medical exam to prove insurability.
- Premiums will be very expensive when you renew.
- Annually renewable term life insurance premiums increase every year.
- Renewal of your policy is only guaranteed until a predetermined age, it is not permanent.
- You cannot switch your renewable term life insurance policy to a whole life insurance policy. Although expensive, a whole life policy may be more affordable in the long run than renewable term life insurance.
Who Renewable Term Life Insurance May Benefit:
Life insurance is a very personal decision, but there are some people that renewable term life insurance works best for.
- Policyholders with medical conditions that make purchasing a new term life insurance policy very difficult.
- Those who have reached an age where finding a policy with their original death benefit amount proves more expensive than renewal, or where they cannot qualify for a new policy based on their age.
- Insured persons who have experienced employment or lifestyle changes that make it a difficult to buy another term life insurance policy.
Here’s an example of how this might work for someone.
James and Kelly both have renewable term life insurance policies that they purchased when they married. They have a young daughter, Ellen, who has special needs and who attends school only part-time. Their older daughter Emily, 17, just got accepted into a pre-med program at a prestigious private college where tuition is just as impressive as the college’s reputation: $60,000 per year with room and board. Minus a merit scholarship, Emily will have paid just over $200,000 in tuition when she graduates, and that’s before she even gets to medical school.
James and Kelly want to protect Emily from having to take on private student loans, so they plan to continue coverage for the next 10 years to make sure that she will have support through medical school if one or both of them pass away.
Hoping to earn more to help Emily and prepare for retirement, James recently received his pilot’s license and is embarking on an exciting new career running his own charter plane service.
Unfortunately, James experienced late-onset Crohn’s Disease in his early 40s, and although it is controlled with medication, this will add to the challenges that he will face in finding a new term life insurance policy.
Because James has renewable term life insurance, he can extend his policy when the term ends without having to undergo a medical exam or report his new (and rather risky) job. His term life insurance coverage ends the same year that Emily enters her dream college.
Because Kelly is healthy and has not changed her job, she simply applies for a new term life insurance policy.
While this is an example of how someone could use renewable term life insurance, it isn’t James’ only choice if he wants to maintain coverage, though.
Another alternative is a convertible term life insurance policy.
While your costs after term conversion will be more than for your original policy, your premiums will not go up each year as with an annual renewable policy.
Renewable Term Life Insurance vs. Convertible Term Life Insurance: What’s the Difference?
Just like a renewable term life insurance policy, a convertible term life insurance policy may be included as a rider with your original term life policy.
However, a convertible term life insurance policy permits you to convert your existing policy into a whole life plan.
Each life insurance company may have different guidelines regarding when you may convert your policy—some may require you to wait a certain period of time into your term. There may also be restrictions on which permanent life insurance policies you are allowed to convert your term life insurance policy into.
Your life insurance company will be able to provide the details of your policy and help you through this transition.
Going to the example we just used, a convertible term life insurance policy could benefit James and Kelly in the following instances.
James’ Crohn’s disease becomes debilitating and cannot be controlled by his current therapy. If this happens, he may be unable to find the right amount of term life insurance necessary to protect his family when his term runs out.
Because his current 20-year term will be ending just as Emily enters college, James wants extended coverage just in case his daughter’s career takes more than a few years to take off.
His convertible term life insurance rider allows him to convert to a whole life policy before his term ends, allowing him to have permanent coverage at a set premium while his Emily pursues her career. Because his life insurance company has a time limit on when he can convert his policy, he does so immediately after his diagnosis.
Upon conversion, James has the peace of mind that his family will be protected if, for example, he is stricken with a terminal disease which is often comorbid with Crohn’s, such as colon cancer.
If Ellen’s condition worsens and it becomes clear that she will need full-time care throughout her life.
Another instance may be if it is determined that Emily’s younger sister Ellen will require more expensive care as her symptoms get worse over time. That means that household expenses will go up significantly over time, and there will not be a point in the future when Kelly will not need coverage to help care for Ellen.
Convertible Term Life Insurance: The 30-Second Summary
Convertible term life insurance allows you to convert your policy to a permanent life insurance policy without having to repeat the underwriting process.
- Your premiums will be based on your original risk class.
- Risk class is the level of risk that your life insurance company assigns to your application based on your current health, lifestyle, medical history, and other factors.
- Your premium rate when your policy is converted will be based on the age when you are converting the policy, not when you first purchased your term life insurance plan.
The bottom line?
While a convertible or renewable term life insurance is the right fit for some families, both choices may be much more expensive than your original term life insurance plan.
For many families with unique medical or lifestyle challenges in remaining insured, it may prove more cost-effective in the long run to choose to convert to a whole life policy, if the option is available.
While, as with renewable term life insurance, your costs after term conversion will be more than for your original policy, your premiums will not go up each year as with an annual renewable policy.
Whole life insurance is a set amount of life insurance coverage that is meant to provide you coverage over the duration of your life.
- It accrues cash value over time.
- Whole life insurance remains in force for life as long as premiums are kept current.
- It offers policy loan options.
You will normally have the option to convert all or some of your term life policy through term conversion.
A Great Alternative to Renewable Term Life Insurance: Laddered Term Life Policies
Here’s one example:
Jennifer is a stay-at-home mom. She plans to return to the workforce in two years when Dylan is old enough for preschool. Mark already has a 10-year policy designed to provide income replacement coverage until Jennifer returns to work. He has also been able to put away a few years of savings.
Mark purchases a 30-year term life insurance policy. If something were to happen to him, this will provide coverage for both children through college and the first few years of their careers, as well as provide funds to pay off the remainder of their mortgage.
By laddering their two policies, Mark and Jennifer will have just the right amount of coverage for each stage of their lives together.
Policy laddering isn’t only beneficial for growing families.
Singles with consumer debt can also take advantage of the extra protection that a term life insurance policy offers.
Here’s another example:
She has a small business that may require her to travel to far-flung locations with increasing frequency next year. She has her eye on a small apartment that is for sale in an up-and-coming neighborhood.
Because her work now involves significant travel to remote locations (and therefore more risk), she purchases a 10-year term life insurance policy designed to protect her parents who served as co-signers for her current apartment and her student loans. She estimates that within this time period she will be able to pay down her debt. She also purchases a 20-year term life policy that will provide coverage for her parents if they co-sign a mortgage loan for her if she decides to buy the new apartment.
Renewable Term Life Insurance, Convertible Term Life Insurance, or Laddered Term Life Policies: How to Make the Right Choice
For some families, renewable term life insurance or convertible term life insurance may be the right choice, despite the relatively high premiums.
At Quotacy, we understand how the complexity of term life insurance can seem overwhelming at times. We’re ready to help. Learn more about the ins and outs of a term life insurance policy and get your quotes in seconds.
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About the writer
Writer, Editor, and Co-host of Quotacy's Q&A Fridays
Natasha is the content manager and editor for Quotacy. She has been in the life insurance industry since 2010 and has been making life insurance easier to understand with her writing since 2014. When not at work, she's probably studying and working toward her Chartered Life Underwriter (CLU) designation while throwing a tennis ball for her pitbull mix, Emmett, or curled up on her couch watching Netflix. If it’s football season, the Packers game will be on. Connect with her on LinkedIn.