Some term life insurance policies have a renewable term life insurance feature that allows policyholders to renew their cover each year without having to reapply.
However, the downside of this is that the cost of your insurance premiums may increase each time you’re up for renewal.
In this article, we will discuss what renewable term life insurance is, how it works, and how it compares to other term life insurance policy clauses.
A renewable term life insurance policy is a life coverage plan that allows policyholders to renew their coverage every year.
These plans are more affordable than whole life insurance plans and they allow people to extend their coverage for as long as they require. A benefit of these plans is that policyholders won’t have to go through a medical exam or any underwriting each time they renew.
In a term insurance policy, a renewable term clause allows the beneficiary to extend the coverage term for a set period without having to requalify for new coverage.
There are, however, some disadvantages to renewable term life insurance. A major drawback is that the cost of your insurance rises each time you purchase a new policy, making renewable term life insurance plans more costly as you age.
Renewable term life insurance works the same as other types of term life coverage. As long as you pay your premiums, your beneficiaries will receive the money when you die. Your contract will be over once the term ends, and your beneficiaries won't receive a death benefit.
If you have a life insurance policy with a renewable term option, it's important to understand how it works and to know what your options are when it comes to renewals
Keep these points in mind if you’re considering a renewable term plan:
In general, if you decide to renew your life insurance, your costs are likely to go up because of your age and health.
Your insurance premiums will increase each time you renew your term life insurance contract.
Renewable term life insurance is a good option if you need short-term coverage (10 – 20 years) for a debt or other financial obligations that may be difficult to plan for.
A renewable term clause lets you keep your insurance coverage past your term length even if your health has declined.
Although insurance companies typically raise your premiums to cover the additional risk, your policy's death benefit will stay the same.
A level death benefit is a payout from a life insurance policy that is the same regardless of whether the insured person dies shortly after purchasing the policy or many years later.
You can't be turned down for extended insurance if your contract has a renewable term clause and most policies let you keep the same coverage with higher premiums.
You can usually keep renewing it until you reach 65 (or a prediscussed age), but you can't renew after that.
With these policies, you are guaranteed insurance for a set period and a level death benefit. This can be a good option if you need life insurance but are worried about being denied coverage later on.
However, it's essential to read the fine print of your policy, as some renewable term life insurance policies have clauses that could make them void if you don't follow the rules.
A common mistake is confusing a renewable term with convertible term life insurance, even though they differ.
Convertible term life insurance allows you to convert your current term coverage into permanent life insurance, such as whole life or universal life insurance.
One final thing to remember is that a renewable term clause is not the same as an annual renewable term policy.
An annual renewable term policy starts as a one-year contract with the option to extend it each year.
For example, let’s say you purchase an annual renewable term policy for 2022. At the end of the year, your coverage will end and you’ll be given the option of renewing it for 2023 (the following year).
A renewable term clause is a bit different. With a term policy that has this provision in it, you’ll sign a term life insurance contract for 5, 10, or 20 years. Once this period ends, you’ll be given the option to renew your policy for another period of time.
For example, let’s say you get a five-year term life insurance plan with a renewable term clause in 2022. Your coverage will stay in place until 2027, and once the term finishes, you’ll be given the option of renewing your term life contract for another period.
Renewable term life insurance plans offer policyholders a flexible, affordable way of insuring their lives. They are a good option for people who have short-term financial responsibilities when their initial coverage ends.
Here are some of the benefits that renewable term life insurance offers:
Life doesn't always go as planned. If your term life insurance is about to run out and you still need coverage, a renewable term clause can help you extend your insurance to meet your changing needs.
In the short term, extending your term life insurance is often cheaper than buying a new policy or switching to a permanent one.
However, your premiums for the renewed term policy will most likely be more expensive than before.
The renewal term clause in your contract means that you don't have to start a new application or get quotes from other insurance companies.
If you don’t want to go through an underwriting process or application again, renewing your term life insurance is convenient to keep your coverage.
Renewable term life insurance doesn't require you to answer any more health questions or to undergo a new medical exam.
If your health has changed since you first bought your policy and you’re worried that another life insurance provider might reject your application, then renewing your term life insurance is a good option.
Because term life insurance doesn’t last for your entire life, you’ll need to consider what happens once your coverage ends. Your options are to:
Renew your current policy on a year-by-year basis (if your contract includes a renewable term clause).
Buy a new term life policy.
Convert your term life policy to a permanent life policy.
Buy a new permanent life policy.
Stop your life insurance.
You’re probably wondering how much more it will cost and whether you’re better off getting a new policy altogether.
In some cases, it may be worthwhile for you to continue your renewable term life policy. But in others, it may be a better idea to switch to a new term life plan or get a permanent policy.
For example, it could be worth keeping your life insurance coverage for three more years if you have three years left on your mortgage.
However, if you think you'll need it for five years or more and you're in good health, you may be able to get a new level term life insurance policy for less money.
Even though you might face higher premiums now that you’re older, purchasing a shorter term — such as 10 or 15 years instead of 30 — can still save you money in the long run.
When your term life insurance policy ends, a renewable term policy might be your best option if you have short-term financial responsibilities.
However, if you’re still in good health, it may be cheaper to get quotes for a new permanent life policy from other insurers once your term life plan ends.
If you’re interested in learning more about renewable term life insurance or different life insurance options, head to PolicyScout’s life insurance hub.
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