Term life insurance can be an effective way to protect your loved ones from financial hardship after your death. However, traditional term life insurance policies have a set expiration date. If you outlive the term, you lose your coverage. To address this issue, renewable term life insurance policies were introduced, providing a solution for those who want to maintain their coverage.
What Is a Renewable Term Clause?
When you purchase a term life insurance policy, it specifies the duration of your coverage. For example, a five-year term policy provides coverage for five years. If you outlive the term of a nonrenewable policy, your coverage ends, and you may need to undergo health underwriting to purchase a new policy. This could lead to higher costs or affect your eligibility if you developed health issues since your original purchase.
Some insurers offer term policies with a guaranteed renewable term clause. With these policies, you have the option to extend your coverage at the end of the original term without undergoing additional health underwriting or a medical exam.
How Does a Renewable Term Policy Work?
If your term policy includes a renewable clause, the insurer will offer you the option to renew your coverage when you reach the original policy’s expiration date. The clause specifies the duration for which you can renew your coverage. Some policies allow you to renew for the same term as your original purchase, while others only allow one-year extensions, known as annual renewable term policies.
Each time you renew, the price of your life insurance will likely increase based on your age at the time of renewal. However, your health status at the time of renewal will not affect the price. The insurer will base the premium on the health rating you received when you first signed up.
What Term Length Can You Use?
Term life insurance policies can have durations as short as one year or as long as 40 years. The longer the term, the higher the monthly premium will be, as the likelihood of the insurer having to pay out the death benefit increases.
While short-term renewable policies may have lower initial premiums, they become more expensive over time. If you continuously renew a one-year annual renewable term policy for 20 years, you may end up paying more than if you had initially purchased a 20-year term policy.
How Long Can You Keep Renewing?
Renewable term policies have limits on how long you can renew. Insurers typically set an age limit, commonly age 70, for policy extensions. If you are still alive at the age limit, your term coverage will end without the option to renew. The insurer may also specify a maximum number of times you can renew.
However, even before reaching these limits, the cost of renewing a term policy may become unaffordable. As you age, the insurer increases the premium at each renewal, making the extended coverage more expensive. Therefore, renewable term life insurance is considered a short- to medium-term solution rather than a long-term one.
How Else Could You Extend Your Insurance Coverage?
Another way to extend temporary coverage is through convertible term life insurance. These policies offer the option to convert your term policy into permanent coverage, such as whole life or universal life insurance. Permanent life insurance policies do not have an expiration date and can last your entire life as long as you continue paying the premiums.
Permanent life insurance policies can also accumulate cash value, which can be withdrawn or borrowed against while you are alive. However, accessing the cash value reduces the death benefit. While permanent life insurance generally costs more than term coverage, some policies, like whole life, have fixed premiums that do not increase with age.
If your term policy includes a convertible option, you can make the switch to permanent coverage at any point before the term expires. You will not need to undergo health underwriting again, and any medical issues that arise later will not affect the price of your new policy. The cost of the permanent policy will be based on your age at the time of conversion, with the price increasing the longer you wait.
How Does Renewable Term Compare with Convertible Term?
Renewable term life insurance initially offers a more affordable option for extending your coverage compared to converting to permanent life insurance. Although the premiums increase with each renewal due to the policyholder’s age, it is still more cost-effective compared to continuously renewing a term policy or transitioning to a permanent policy. While the premiums for convertible term life insurance are higher when converting to permanent coverage, they do not increase as much with ongoing renewals. In some cases, the premiums for whole life insurance may remain the same after conversion.
Renewable term life insurance is a temporary solution that allows you to extend your coverage while keeping your options open. It is a more suitable choice for short- to medium-term needs. On the other hand, conversion to permanent life insurance provides coverage for the rest of your life and offers additional benefits like cash value.
What Are Advantages of Renewable Term?
Renewable term life insurance offers several advantages:
- Low-cost initial premiums: Renewable term policies are significantly cheaper than permanent life insurance policies, making them a more affordable choice when you have a limited budget and other financial needs.
- Flexibility to continue coverage: The main drawback of term life insurance is its expiration. However, with renewable term life insurance, you have the guaranteed option to extend your coverage. This flexibility allows you to adapt your insurance needs to your changing circumstances.
- No risk of future health denial: If your term life insurance includes a renewable clause, you can extend your coverage regardless of any changes in your health. You do not need to answer medical questions or undergo another health exam to renew. The insurer commits to extending your coverage without health underwriting. Additionally, if you develop a health issue later, it will not affect the price of your life insurance renewal.
- Large death benefit for a low premium: Term life insurance offers a high death benefit — potentially six figures or more — for a relatively affordable upfront cost. This can help you cover significant financial obligations such as mortgage payments, replacing your income for your family, or paying off student loans.
What Are Potential Drawbacks?
While renewable term life insurance has several advantages, there are also potential drawbacks:
- Higher premiums compared to non-renewable term: Insurers may charge higher premiums for renewable term policies due to the additional risk they assume. Since they cannot check the policyholder’s health at each renewal, they account for this by increasing the premium.
- Increasing costs with each renewal: With every renewal, the insurer adjusts the premium based on the policyholder’s age. For annual renewable term insurance, the price will likely increase each year. These increases can strain your budget over time, unlike term policies that lock in the price for many years or whole life policies with fixed premiums. Eventually, the cost of renewal can make the policy unaffordable.
- Limits on renewal: Insurers typically set limits on how long you can renew a term policy. This could be a maximum number of renewals or a specified age limit. If you outlive these limits, your coverage will end.
- Lack of cash value: Renewable term life insurance does not accumulate cash value. The premiums you pay only go toward the death benefit and do not provide any accessible funds while you are alive. Cash value is only available with permanent life insurance policies.
When Might Renewable Term Insurance Make Sense?
Renewable term life insurance can be a suitable choice in the following scenarios:
- Short-term coverage: If you only need life insurance for a few years, renewable term policies can provide cost-effective protection. You can sign up for affordable coverage and renew if you decide you still need insurance after the initial term expires.
- Future health concerns: If you anticipate potential health issues in the future due to preexisting conditions or family history, renewable life insurance allows you to extend your coverage without being denied due to health reasons.
- Flexible coverage options: If you want the flexibility to continue your coverage or convert to permanent life insurance later, finding a term policy that is both renewable and convertible can offer the best of both worlds.
However, if you require long-term coverage for several decades or your entire life, it may be more appropriate to consider a longer-term rate with an extended term policy or explore permanent life insurance options. These choices may have higher initial premiums but can prove more affordable in the long run compared to continuously renewing term coverage.
Reviewing Your Unique Needs
To determine the best type of coverage for your situation, it is advisable to consult a financial professional. They can provide personalized guidance based on your individual circumstances and help you compare various options. With their expertise, you can select a policy that meets your current needs and aligns with your anticipated future requirements.
Adjusting your life insurance policy as your circumstances evolve is essential, and renewable term options offer advantages for those looking to maintain continuous protection.
