Renewable term life insurance has become a popular option for people who want to ensure coverage in case something happens.
But is renewable term life insurance right for you? To help you answer that question, in this article we will cover:
- What is an annual renewable term policy, and how does it work
- Advantages and disadvantages of renewable term life insurance policy
- The best alternative – Infinite Banking Concept
Let’s dig in!
What is Renewable Term Life Insurance?
A term life insurance policy is a longer-term policy.
However, your loved ones are left without financial protection once the policy expires.
For your family to use the death benefit, the life insurance has to be renewed.
The term policies come with a renewable term clause that allows you to automatically renew your term life policy and extend the coverage once it expires. Therefore, you and your family will have financial coverage for unexpected expenses, loans, or debts.
This can be a great temporary solution to some money problems. However, you should be aware of some of the additional costs.
How Does Renewable Term Life Insurance Work?
The future is uncertain, and while you maybe feel good today, you never know what will happen tomorrow. Thus, the renewable term clause allows you to extend your current term life coverage for a certain period, without a new medical exam, or even if your health is slowly deteriorating.
The life insurance company will most likely allow you to renew your policy until you are 90. However, at a higher cost compared to the previous rate.
Each time you decide to renew your policy, the insurer will consider your current age and accordingly assess the cost of the premium.
The coverage and premium cost are essential in the case of the annual renewable term life insurance (ART). The cost is determined on an annual basis and will be slightly higher compared to the previous year due to the increased risk of developing a disease or dying.
Also, you should not mix up an annual renewable term life insurance with convertible term life insurance. The latter allows you to convert your current coverage to premium life insurance, which doesn’t have an expiration date.
Who Should Get a Renewable Term Life Insurance?
Life insurance agents consider your current age, health, and the risk of dying when assessing the life insurance coverage and cost of premiums.
Therefore, it is better to buy the policy in your 20s and 30s because the risks are lower, and the premium cost will be lower.
However, once the term insurance expires, the premium will be determined according to your new age, so don’t expect to get away with low premiums forever.
You can also get a renewable term life policy in case you’ve recently lost a job, don’t have access to benefits at your job, are waiting until you buy a group term policy through your future employer, or have some debt.
Advantages of Renewable Term Life Insurance Policy
Here are some of the advantages of the renewable term policy:
Life doesn’t always happen according to plan. While you might not need the coverage right now, you don’t know if you will need it in the future.
A renewable term life policy allows you to reassess your needs for insurance coverage each year.
Because you are only renewing your old policy, the cost is lower than if you would have to buy the entire new policy.
If you want to extend coverage, you can do it within the insurance company that provided the previous insurance. You don’t have to search for another company when that term expires and submit an application there.
A renewable term policy can cover small, unexpected expenses such as loans, debt, maintenance bills, or even vacations. It is a good solution for short-term coverage. However, it is cost-efficient only up to certain age.
You Don’t Undergo a New Medical Exam
The policy is renewed without taking an additional medical exam or answering new health questions. Even if your health is not as good as the first time you bought the policy, you will not be denied to renew it.
Disadvantages of Renewable Term Life Policy
However, there is always another side of the coin, and while it may seem that this type of term life insurance has many benefits, it has just as much as downsides.
The biggest downside of this type of policy is the overall higher cost.
The original premium is not the same as the new premium, and within the first five years, you can notice how expensive it truly can be.
While it may seem like the most affordable type of term insurance at first, as you get older and those premiums increase, you will notice how much money you are spending on your insurance every time the policy ends and you decide to renew it.
Moreover, the companies have a renewable option, but they also have a limit on how much they can charge for premiums. Once you reach that limit, you will lose the opportunity to renew your policy.
Also, it may seem that the premium is affordable, yet, in many policies, such as the whole life policy, it is even cheaper, so this is not the best option if you are taking the cost as the deciding factor.
No Investment Component
This type of term policy does not come with cash value build-up, and while you will be paying more in premiums, you and your beneficiary have access to the same death benefit.
This also means that you cannot use term life insurance policies for retirement planning but just for current financial obligations.
It Cannot Be Converted
The renewable term life policy cannot be converted to other longer-term policies, like a permanent life insurance policy or whole life policy.
This can only be done with convertible term life insurance.
So, instead of taking a chance, buying the annual renewable term, deciding after a few years that it is too expensive, and purchasing a whole life policy, we recommend that you simply start with it.
This permanent policy provides permanent coverage throughout your life and the possibility to earn dividends.
Additionally, it is a type of life insurance policy that builds cash value, and you can use these benefits to become your own bank.
Wondering how? Let’s introduce you to the Infinite Banking Concept!
Own Your Finances – the Infinite Banking Concept
The Infinite Banking Concept is all about using your life insurance policy and long-term coverage as a tool for financial growth.
You pay into the policy, and the policy’s cash value grows tax-deferred. You can then access the policy’s cash value through loans, which can be used for anything you want.
The loans are typically at a lower interest rate than what you would get from a bank, and they’re not taxed as income.
This concept can be used to build wealth, pay for unexpected expenses, fund major purchases, or even free up cash flow. It’s a flexible tool that can be used in various ways to help you reach your financial goals.
If you decide to give up on your policy, you will earn some money through the cash surrender value of life insurance.
While renewable term life insurance has some advantages, the lack of investment components and high premiums calculated according to your age will take money from your pocket instead of putting it in your pocket.
The whole life insurance policy overcomes all of these limitations, and if you use it correctly, you can earn money, free yourself from the chains of banks, and take your finances to the next level.