Level Term vs. Annual Renewable Term Life Insurance: Pros and Cons
Term life insurance is a popular type of life insurance policy to protect your family's financial future in case the worst happens.
Even then, it comes in different forms.
Level term insurance and renewable term life insurance provide similar coverage but the premiums are priced differently.
Before you make a decision on either one, learn how they work and compare the pros and cons of level vs. annual renewable term life insurance.
What is Term Life Insurance?
Term life insurance is a category of life insurance that lasts for a specific period of time.
This time period is called the term of the policy.
When you sign up for the policy, you usually have to take a medical exam.
If you pass, you get assigned a premium amount.
If you decide to start coverage, you start making premium payments.
As long as you die while the policy is in effect, the insurance companies pay out death benefits to your beneficiaries.
If you die after the policy expires, you receive nothing.
This may seem like a bad deal, but it helps keep premiums affordable.
These policies are very different from the other main type of life insurance.
The other type is called permanent life insurance.
Permanent life insurance lasts your whole life.
The key is you must keep the policy in effect by making premium payments.
This means the death benefit will be paid out as long as you keep your policy in effect.
Due to this difference, permanent life insurance is often much more expensive than term life insurance.
Financially speaking, term life insurance is typically considered the better deal.
You can choose between different types of term life insurance, though.
Here’s what makes each type of term life insurance different.
What is Level Term Life Insurance?
Level-term life insurance refers to the fact that the premiums will remain the same throughout the life insurance term.
This is the traditional type of insurance you get when purchasing term life insurance.
Typically, these policies are for the long term.
They’re often sold in lengths:
- 10 years
- 20 years
- 30 years
Ideal for supporting young children
These policies are typically used to provide financial support until kids leave home.
After children graduate from high school or college, chances are your expenses will decrease drastically.
Your spouse may even be able to support themself entirely on their own without support from you in any way.
This type of life insurance may be more expensive than renewable term life insurance initially.
Level-term life insurance usually comes out cheaper overall after considering the entire life of the policy, though.
Young people can take advantage of the level premiums.
They can do this by locking in rates for decades when they’re young and healthy.
By the time the term life insurance policy expires, you’ve hopefully had enough time to build up a sizeable amount of assets.
If you do this, it can allow you to self-insure should you pass away after your term life insurance policy expires.
This way, you don’t have to purchase another policy at a higher rate when you’re older.
There are downsides to this type of policy, though.
Many people end up not following through with their investing plans.
If you still need life insurance but can’t self-insure when the policy ends, you could end up with a significant financial shock.
Life insurance prices could increase drastically over 20 or 30 years.
This is especially true if you develop health conditions.
In some cases, you may not even be able to get a new policy.
What is Renewable Term Life Insurance?
Renewable term life insurance can come in different varieties.
The most popular is annual renewable term insurance. This is also known as yearly renewable term life insurance.
Other renewable periods may also be possible.
This type of life insurance works in a unique way.
You initially take a medical exam and get approved for coverage.
Then, you have a short-term life insurance policy that typically lasts somewhere between one and five years.
The initial premiums for the first policy term are as low as they’ll get. These premiums are often lower than a level term life insurance policy at first.
At the end of each policy term, you have an option to renew the policy.
The best part is you don’t have to take a medical exam to renew.
Your contract specifies how many times you can renew the policy. There is usually an age limit.
For instance, an annual renewable life insurance policy renews each year.
Of course, you must still qualify based on your age and take action to renew it.
Premiums will increase
Unfortunately, the premiums will increase based on your age if you do decide to renew.
Over time, rates for the policy will increase. Eventually, they will end up more expensive than a level-term life insurance policy.
You may find yourself considering an annual renewable term life insurance policy to save money on premium payments.
However, you should compare the cost of a level-term life insurance policy with the premiums you’d pay for a renewable term life insurance policy.
The level-term policy is usually cheaper over the entire period.
This makes sense when you think about it.
Your chances of dying during the first renewable term are very low due to your young age.
Each year you get older, your risk of dying increases. This means the premiums increase with that risk.
Ideal for temporary coverage
These policies may make sense in certain situations, such as a temporary need.
You may only plan to need life insurance for a very short period of time.
In these cases, the lower premiums may work out for you.
For instance, you may get one of these policies while you pay off your student loan debt.
This way, a cosigner has the money to pay off the loans should you die early.
If this will only take five years, this type of policy may make sense.
They may also make sense if you’re working on improving your health.
You can lock in lower rates for the short term while you work to quit smoking or lose weight.
Unfortunately, life insurance companies require you to have maintained your better health to secure lower rates.
Often, this means staying at a lower weight or staying clean from smoking for a year or longer.
While you wait for this time period to expire, an annual renewable term life insurance policy can offer the coverage you need.
These policies don’t always make sense, though.
In fact, they rarely make much sense if you plan to keep the policy the entire time you possibly could.
How to Choose the Right Term Life Insurance Policy for You
Choosing between a level-term life insurance policy and an annual renewable-term life insurance policy depends on your situation.
You need to decide what your goals are for your life insurance policy.
You may only need a life insurance policy for the short term. In this case, an annual renewable term life insurance policy may be more affordable.
People that want a long-term solution may be better off with level-term life insurance.
Of course, any financial decision is rarely that simple.
You may not be able to afford a level-term life insurance policy today.
You might be able to afford an annual renewable term life insurance policy.
In this case, some life insurance is likely better than having none at all.
Just have a plan for the future when the annual term life insurance rates increase.
Hopefully, you’ll be making more money and can afford a level-term life insurance policy in the future.
Consult an Expert
Big financial decisions may feel overwhelming if you aren’t a financial professional.
In these cases, it may make sense to consult an expert about your life insurance needs.
They can help you decide which type of term coverage is best for your situation. They can also suggest if permanent life insurance may be a better fit.
Unfortunately, life insurance salespeople are paid on commission.
This means more expensive policies, such as permanent life insurance, likely pay them more.
This provides a conflict of interest as permanent life insurance may not be in your best interests.
Instead, consider consulting a fee-only fiduciary financial planner.
These advisors don’t get paid commissions and must give you advice based on your best interests.
You do have to pay them for their time directly, though.