What Is Renewable Term Life Insurance?

Term life insurance can be an effective way to help protect your loved ones from unexpected financial hardship following your death. However, it's designed to be temporary coverage with a set expiration date. If you live past the set term, you lose your insurance protection. One way to avoid this problem and keep your coverage going is by using a renewable term life insurance policy, such as annual renewable term.

Here's some of what to know about renewable term policies, how they work and when they might make sense for you.

What Is a Renewable Term Clause?

When you buy a term life insurance policy, it explicitly states how long the coverage will last. For example, a five-year term will cover you for five years. If you live longer than that length of time on a nonrenewable policy, that would be the end of your life insurance protection. You could try buying another policy after the term expires, but it might require you to undergo health underwriting again. If you developed any health problems since your original purchase, it could potentially become more expensive to sign up or affect your eligibility.

Some insurers sell term policies that include a guaranteed renewable term clause. With these, at the end of your original policy, you would have the option to extend your life insurance coverage without answering additional health questions or passing another medical exam.

How Does a Renewable Term Policy Work?

If your term policy includes a renewable clause, the insurer will ask if you want to renew and keep your coverage once you reach the original policy expiration date. The clause will state how long you can renew coverage for. Some policies let you renew for the same term you originally purchased. In that case, you could extend a five-year term policy for another five years. Others might only allow you to extend for one year at a time. These are known as annual renewable term policies.

Every time you renew, the price of your life insurance will likely go up. The insurer bases the new premium on your age at the renewal time. Since life insurance tends to get more expensive as you age, this means you'll probably pay more with each extension.

However, your updated health status will not matter for the renewal. The insurer will base prices on the health rating you received when you first signed up. If you develop a health issue later, it won't lead to higher rates when you renew. Only your age will affect the price.

What Term Length Can You Use?

Term life insurance policies can last as little as one year or as long as 40 years. After you sign up, the premium stays the same for the entire term. The longer the term, the more expensive your monthly premium will be. This is because the longer you stay covered, the higher the chance is that you could pass away during the term and the insurance company will have to pay out your death benefit.

A short-term renewable policy often costs less at first but gradually becomes more expensive. For instance, if you were to buy a one-year annual renewable term policy, its initial premium would be lower than a 20-year term policy. But if you keep renewing year after year for 20 years, you could end up paying more in total than if you had locked in a 20-year-term rate from the beginning.

How Long Can You Keep Renewing?

You can't renew a term policy indefinitely. Insurers set an age limit for these policy extensions; most commonly it's age 70. If you're still alive at the provider-set age limit, your term coverage would end without the option to renew. Alternatively, the insurer might limit the number of times you can renew.

As you go along with a renewable term policy, you may find your coverage becomes unaffordable even before you reach these limits. The insurer will likely increase the rate every time you renew, so the extended coverage eventually might become too expensive to keep. For this reason, renewable term life insurance is considered a short- to medium-term solution, not a long-term one.

How Else Could You Extend Your Insurance Coverage?

Convertible term life insurance is another way to extend temporary coverage. These policies give you the option to swap your term policy into permanent coverage, such as whole life or universal life. Permanent life insurance policies do not have an expiration date. As long as you keep paying the premiums, the coverage can last your entire life.

Permanent life insurance policies can also build cash value. This is a reserve of money you could withdraw or borrow from while you're still alive, though doing so reduces your death benefit. In exchange for these extra benefits, permanent life insurance costs more than term coverage. However, some policies, like whole life, keep the same premium from the time you sign up. It won't get more expensive as you get older.

If your term policy includes a convertible option, you could make the switch to permanent life insurance at any point before the coverage expires. You would not need to pass health underwriting, and medical issues wouldn't increase the price of your new policy. The price of the permanent policy would be based on your age when you convert. The longer you wait to make the switch, the more expensive it would be.

How Does Renewable Term Compare with Convertible Term?

At first, renewable term life insurance makes it less expensive to extend your coverage. Although the premiums increase upon renewal because you're older, you're still using a more affordable term policy versus higher-cost permanent insurance. Remember that each time you renew, the cost of the term coverage is likely to go up.

With a term conversion, the premiums start out significantly more expensive once you make the switch to permanent. However, they will not increase by as much after that compared with ongoing renewals. The future premiums could even stay the same if you convert to whole life.

As noted, renewable term is a temporary solution. While you can extend your coverage, you may reach a point where it's not affordable (because of increasing premiums) or not possible (because of renewal limits) to keep it going. Converting gives you a policy you can have for the rest of your life.

Lastly, converting can allow you to switch to a policy with cash value whereas renewing term coverage does not.

For short- to medium-term extensions at a lower price, renewable term could be more suitable. It's less expensive at the start while still keeping your options open to continue your coverage. If you're interested in long-term lifetime coverage, a conversion could make more sense.

What Are Advantages of Renewable Term?

• Low-cost initial premiums. Renewable term policies are significantly less expensive than permanent life insurance policies. This makes it an affordable way to buy insurance protection when your budget is limited and you have other financial needs.
• Flexibility to continue your coverage. The main drawback of term life insurance is that it eventually expires. However, with renewable term life insurance, you have the guaranteed option to extend your coverage. That way, you don't have to guess your insurance needs far into the future. If you still need life insurance, you could renew. If you don't, you could just let the original term policy expire.
• No risk of a future health denial. If your term life insurance includes a renewable clause, you keep that option regardless of what happens to your health. You do not need to answer medical questions or take another health exam to extend your coverage. The insurer agrees when you first sign up that it will extend your coverage without health underwriting. In addition, if you get sick later, that will not affect the price of your life insurance renewal.
• Large death benefit for a low premium. Since term life insurance costs less than permanent, you can sign up for a large death benefit — potentially six figures or more — for a relatively affordable upfront cost. This might help you afford enough to cover sizable needs like paying off your mortgage, replacing your income for your family or paying off student loans.

What Are Potential Drawbacks?

• Premiums could be more expensive than with a non-renewable term. The life insurance company could charge you a higher premium for a renewable term policy versus one that is non-renewable. This is because the insurers are taking on an extra risk that you could develop health conditions by the time you renew, and they won't be able to check your health as part of making the extension. As a result, they may charge more for providing you this flexibility.
• Your costs will probably go up each time you renew. Every time you renew, the life insurance company resets the premium based on your older age. For annual renewable term insurance, the price will likely go up year after year. These increases can put a growing strain on your budget versus a term policy that locks in the price for many years or a whole life policy where the premiums don't increase over time. Eventually, the cost of the renewal could make the policy unaffordable.
• There are limits on how long you can renew. The life insurance company is likely to set some sort of limit for the renewal clause. Insurers might say you can renew no more than a certain number of times or that you can't extend past a set age limit. If you live long enough, you will not be able to renew at some point, which means losing your coverage.
• It doesn't build cash value. Renewable term life insurance does not build cash value. Your premiums only pay for the death benefit and not for any money you can use while still alive. Cash value is only available with permanent life insurance policies.

When Might This Policy Make Sense?

A renewable term life insurance policy could make sense if you'd like life insurance protection for a short amount of time — for example, up to five years — but aren't sure whether you'll still need life insurance after that. With these policies, you can sign up for affordable coverage now. Then, if you decide you'd still like insurance after the first term expires, you could renew.

The renewal options can also be helpful if you're worried about possibly developing health issues in the future because of preexisting conditions or family history. With renewable life insurance, you can extend without being denied for health reasons.

On the other hand, if you know you'd like long-term coverage, either for several decades or for your entire life, you may be better off locking in a long-term rate with an extended term policy, like a 20- or 30-year term, or with a form of permanent coverage. These policies may start out more expensive, but over time, they can end up being more affordable compared with continuously renewing at increasingly higher rates.

Another option could be decreasing term life insurance. Decreasing term life insurance provides a death benefit that decreases over the course of the policy term, with the goal of matching the policy's payout to major financial obligations that also decrease over time, like a mortgage. The premium payments for decreasing term life insurance remain level even as the death benefit decreases.

To give yourself more flexibility, you could also find out whether you could make your term policy both renewable and convertible. That way if you only need coverage for a few more years, you could extend it. If you'd like lifetime coverage, you could convert to a permanent policy.

Reviewing Your Unique Needs

For more help with deciding what type of coverage makes sense, consider meeting with a financial professional. They can take a personalized look at your individual situation and help you compare your options. With their guidance, you can find a policy that meets your needs today as well as the needs you're likely to have in the future.