What Is Renewable Term?

A renewable term is a clause in a term insurance policy that allows the beneficiary to extend the coverage term for a set period of time without having to re-qualify for new coverage. A renewable term is contingent on premium payments being up to date, as well as a renewal premium being paid by the beneficiary.

How Renewable Term Insurance Works

In the context of a life insurance contract, a renewable term clause would be beneficial, as future health circumstances are unpredictable. Although the initial premiums are likely to be higher than those of a life insurance contract without a renewable term clause (the insurance company must be compensated for this increase in risk), this type of insurance is usually in the beneficiary's best interest.

Most financial advisors recommend getting insurance policies with renewable terms whenever possible. The majority of term life insurance policies are renewable, but not all.

Renewability is important because, normally, an insurance policyholder will want to renew a policy once the term is up, assuming their life circumstances don't change drastically, such as if one's health deteriorates, renderings someone uninsurable. Renewability enables a policyholder to keep current coverage (though likely at a much higher premium) without having to re-qualify.

In general, having a renewable term on a term life insurance provides peace of mind for the possibility of a worst-case scenario. In an annual renewable term (ART) life policy, the initial contract is for one year and renews annually. Such policies offer guaranteed insurability for a set number of years, as well as a level death benefit. The policy’s premiums are reassessed annually, and a policyholder is likely to pay more as they grow older. The main reason for choosing an ART would be if someone needs short-term life insurance fast.

Key Takeaways

  • Renewable term refers to a clause in many term life insurance policies that allow for its renewal without he need for new underwriting.
  • With renewable term, coverage can be extended even if the insured's health has declined, but the new premiums will reflect their older age.
  • Renewable term life will often have some limit at which point renewal is no longer an option, such as until age 70.

Renewable Term Life vs. Convertible Term Life

People often confuse renewable term life insurance with convertible term life insurance. While a renewable term life insurance policy allows you to simply extend your current coverage, having a convertible term life insurance policy means that, at any point during your term or before your 70th birthday (whichever comes first), a policyholder may convert term life coverage to whole life coverage.

The two types of insurance are similar in that the insured, regardless of his or health, does not have to re-qualify or pass additional screening. They differ in that renewable term life cannot be switched to whole life, while convertible term life can be switched to whole life insurance.