What is Annual Renewable Term Life Insurance (ART)?

Learn more about annual renewable term life insurance, how it defers from term life insurance and whether or not you should get it.

July 6, 2021

Standard term life insurance provides coverage for a set number of years. With annual renewable term life insurance, you buy coverage for one year, and you can renew it each year at a higher premium. These policies are best suited for short-term needs since premiums usually start low and increase with every passing year.

Continue reading to find out what annual renewable term life insurance is, and more importantly, if it is the right choice for you.

What is annual renewable term life insurance?

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To understand what annual renewable term (ART) life insurance is, let’s look at the term itself. There are three keywords in it:

  • Annual (meaning the policy lasts one year);
  • Renewable (indicating you can renew the policy at the end of its term — which, by default, is one year); and
  • Term life (that is, the policy lasts for a set period or term).

This means ART coverage is a one-year term policy that you can renew at the end of each year. You do not need to submit proof of insurability to renew the policy.

Annual renewable insurance is relatively cheap, but your premiums will go up every year or after every few years because your mortality risk increases with age.

Given its affordability, an ART policy can be an attractive option when you are on a budget. But eventually, you may want to switch over to a traditional term life policy that lets you lock in low rates for 10-30 years.

How does annual renewable term life insurance work?

With an annual renewable policy, the insurer sets your premium rate based on your current age, health status, and the preferred coverage amount. You are automatically eligible to renew the policy after one year without having to undergo a new health evaluation.

ART policies offer two main benefits:

  • Premium wise, they are usually the cheapest life insurance option in the short run
  • You do not need to answer health questions or take a medical exam to renew the policy

ART policies are cheaper than other term lengths initially, but eventually, turn out to be more expensive. As a result, it is an attractive short-term solution. An ART policy can make sense in certain situations:

  • You lost your job and the group coverage along with it
  • You are working in a high-risk job for a short period
  • You want to cover a short-term debt
  • You have recently quit smoking, but will not qualify for non-smoker rates for a few years
  • You want a super cheap life insurance policy until you find a job with benefits

Even though annual renewable insurance is a good option sometimes, for most people a 10-30-year level term policy is likely to be cheaper in the long-run.

Now, you may be wondering: “What does level refer to in level term insurance?” Well, it simply means your premium will remain the same throughout the policy term. For example, buying a 20-year term policy early in your life allows you to lock in low rates for the next 20 years.

What affects the cost of annual renewable term life insurance?

Your life insurance premium rate reflects the kind of risk you present to the insurer — that is, your chances of dying within the policy term. Insurers assess the risk of insuring you through a process called underwriting, in which they closely study your health and wellbeing. They reward young and healthy applicants with lower premiums.

In the case of an ATR policy, the insurance carrier bases your premium rate depending on how likely you are to die that year. This risk increases as you age or develop illnesses.

On the other hand, a traditional term life insurance policy sets your premiums on your age and health at the time of the purchase. That is why it is possible that a 40-year-old applicant might receive similar rates that they paid 15 years earlier. By contrast, a 45-year-old who sign-up for a renewable policy will pay considerably more.

Who should get annual renewable term life insurance?

For most people, a traditional term policy is a better option thanks to its level premiums and stability. However, in certain situations an annual renewable policy could make sense, such as when:

  • You cannot afford a regular term policy: Premium wise, annual renewable term life insurance is the least expensive option. So, if you are on a strict budget, you may want to keep a renewable policy until your financial situation improves.
  • You want coverage for a short period: Do you have a short-term loan that you want to cover? Then you can consider renewable term life insurance. Likewise, you may opt for such a policy if you are taking up a high-risk job for a short period.
  • You are working hard to improve your habits or health: Life insurance companies may offer you standard rates if you give up a harmful habit, like smoking, or improve your overall health. However, you can qualify for lower rates only if you can show improvement for 12 months or more. Until then, a renewable term policy can be a good stop-gap arrangement.

The problem with the annual renewable term policy is that the premium increases every year or every few years. As a result, most people may find it extremely difficult to afford it a few years down the line.  

What are the differences between ART and term life insurance?

Woman standing behind question mark,

Both ART and term life insurance policies are temporary in nature. Nevertheless, there are several key differences between them.

Term Life Insurance Annual Renewable Term
Typically, the term period lasts 10, 20, or 30 years The policy lasts for one year
Generally speaking, the premiums remain the same throughout the term Your premiums increase every year or every few years
Most term life policies are convertible — that is, you can convert a term life policy into a permanent one Annual renewable term life insurance policies might not be convertible
Term life insurance is suitable for various needs. Suitable only for very short term needs.

Alternatives to ART    

If you need life insurance for a very short-term, an ART policy may be a suitable option. For instance, if you need a life insurance policy to cover a short-term loan, you may consider buying an ART policy.

However, other life insurance policies offer a stable rate for a much longer period. For example, some insurance carriers offer five-year renewable term life insurance that is only slightly more expensive than a comparable ART policy. Such a policy lets you lock in low rates for five years as opposed to only one.

Having said that, longer-term life insurance policies are likely to prove to be a better option for most people, especially if you purchase while you are young. You can lock in better rates for 30 years or even more. For example, the average monthly premium for a $250,000 life insurance policy for a 20-year-old may be as low as the cost of a large pizza!

If you want a life insurance policy without an end date, consider permanent life insurance. These policies last as long as you do, provided you pay premiums on time. Some permanent life policies include a savings component, giving you access to a tax-deferred fund that you can access during your lifetime.

How to buy ART?

Person using laptop

Since not all Canadian insurers offer ART, your options may be limited. Nevertheless, you can count on Dundas Life to help you find the right insurer. Regardless of whether you want an annual renewable term life policy or a conventional term policy, we can help you gather multiple quotes so that you can quickly make an informed decision.

Conclusion

Annual renewable term insurance is a unique life insurance product. It provides coverage for one year, with the option to renew the policy at a higher premium. While most people may benefit from opting for a standard term life policy, an ART policy could make sense in certain situations. Speak to a Dundas Life expert today to discuss which term policy will best suit your needs. We can help you find the best coverage at the best price.

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