YOU ASK:

When should I opt for annual renewable term insurance?

WE ANSWER:

If you only need life coverage for a few years, can't afford the high premiums of a permanent life policy and don't want the hassle and inconvenience of applying for a new term policy every year, annual renewable term insurance is probably the best option you have.

Annual renewable term insurance, also commonly referred to as "yearly renewable term", is a pay-as-you-go type of insurance that is automatically renewed on a yearly basis as long as the due premiums are paid. The simplicity, accessibility and affordability of ART insurance are among its greatest merits. ART insurance is particularly popular with young people with short-term life insurance needs, who are also in good health, as they pay the lowest rates.

Annual Renewable Term Insurance - Basic Principles

Mortality Costs

ART rates are always proportionate to each insured's mortality cost, i.e. one's odds of dying at any particular moment. The premiums are calculated as a total of your mortality costs for a year plus any administrative expenses. As your mortality costs increase as you age, premiums increase slightly at the end of every year. Thus, ART premiums can reach prohibitively high levels if a policy owner decides to keep the coverage for more than 10 years.

Insurance consultants do not usually recommend purchasing an ART policy if you need coverage for a period of more than 10 years.

Renewability

Typically, annual renewable policies are guaranteed renewable until one reaches the age of 70, or even 100 with some insurers. ART policies are renewed automatically every year as long as the premiums have been paid. If you fail to make the payment, the policy is terminated.

Evidence of Insurability

One of the major advantages of annual renewable term insurance is that you are only required to furnish evidence of insurability during the application process. After that your ART policy is guaranteed renewable. However, this principle has resulted in the so-called 'adverse selection', since with time, the policyholders in good health tend to drop their ART policies for better and cheaper options, while those in poor health where risk remains, usually continue their ART coverage.

Convertibility

Another advantage of annual renewable term insurance is that it allows you to convert to a cash-value policy at any point in time without having to provide evidence of insurability.

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