Level Term vs. Annually Renewable Term Life Insurance
When comparing life insurance quotes, it’s easy to focus on one number: the monthly premium today.
But two policies offering the same amount of life insurance can work very differently over time.
One policy may guarantee your premium for 10, 20 or 30 years. Another may start with a lower premium but increase every year as you get older.
That difference can become increasingly important the longer you keep your coverage.
Understanding the difference between level term life insurance and annually renewable term insurance can help you compare life insurance quotes more accurately and avoid choosing a policy based only on its starting price.
What Is Level Term Life Insurance?
Level term life insurance provides coverage for a specified period, such as 10, 20 or 30 years.
During the initial term, the premium and coverage amount are generally guaranteed.
For example, if a 35-year-old purchases $500,000 of Term 20 life insurance for $50 per month, that $50 premium would normally remain the same throughout the 20-year term.
The insurer does not increase the premium simply because the insured person gets older during that initial term.
That makes the cost predictable.
At the end of the term, the policy may be renewable at higher guaranteed renewal rates, or the policyholder may choose to apply for new coverage if they remain insurable.
What Is Annually Renewable Term Life Insurance?
Annually renewable term insurance is often referred to as ART or AART, depending on the insurer and product.
Instead of locking in a premium for 10, 20 or 30 years, the insurance renews annually.
Because the insurer is pricing the coverage for a shorter period, the initial premium can sometimes be lower, particularly for younger applicants.
However, the premium generally increases as the insured person gets older.
That means the amount someone pays in the first year may be very different from what they pay later in life.
Why Can Annually Renewable Insurance Look Cheaper at First?
Life insurance risk increases with age.
A 35-year-old generally has a lower mortality risk than a 55-year-old or 65-year-old.
With annually renewable insurance, the insurer is effectively recalculating the cost of coverage as the insured gets older.
That can create a lower starting premium.
A level term policy works differently.
With a Term 20 policy, for example, the insurer establishes a guaranteed premium designed to remain level throughout the entire 20-year period.
As a result, an annually renewable policy may look cheaper in the beginning.
But the initial premium does not tell you what the policy will cost over the full period you expect to keep it.
The Difference Becomes More Important Over Time
Small annual premium increases may not seem significant when someone is young.
The issue becomes more important as the policyholder gets older.
Someone who purchases annually renewable coverage at age 35 may still find the premium manageable throughout their 30s and 40s.
But by the time they reach their 50s, 60s or 70s, the cost of insurance may be substantially higher than it was when the policy was originally purchased.
That does not automatically make annually renewable insurance inappropriate.
It simply means the policyholder should understand how the premium may change over time.
The important question is not only:
What does the policy cost today?
It is also:
What could it cost when I’m older and still need the coverage?
Why Future Affordability Matters
Future affordability is especially important because replacing life insurance can become more difficult as you age.
At 35, someone may have access to many different life insurance options.
Twenty or thirty years later, that may no longer be the case.
The insured person may have developed:
- diabetes
- cardiovascular disease
- cancer or another serious illness
- changes in weight or overall health
- other medical or lifestyle factors that affect insurability
If an annually increasing policy becomes too expensive later in life, applying for a replacement policy may not be easy.
The new coverage could be more expensive, rated, postponed or declined entirely.
That is why future affordability should be considered while someone still has options.
What About Permanent Insurance With Increasing Premiums?
This issue becomes particularly important when coverage is intended to remain in force for life.
Permanent life insurance is generally purchased because the policyholder expects the death benefit to be available whenever death occurs.
But there is an important distinction between:
A policy that is contractually capable of remaining in force for life
and
A policy that is financially realistic to maintain for life.
If someone purchases permanent coverage at age 35 but the required premium becomes unaffordable at age 70, the fact that the policy technically had no expiry date may not help very much.
If the policy lapses because the insured can no longer afford it, the long-term planning objective may not be achieved.
That is why premium structure matters when comparing permanent insurance as well.
Level Premiums Offer Predictability
One of the main advantages of level term insurance is certainty.
If your Term 20 premium is guaranteed at $75 per month, you know what your required premium will be next year, five years from now and fifteen years from now.
That predictability can be valuable when the insurance is protecting things such as:
- a mortgage
- income replacement
- children or dependants
- business obligations
- other long-term financial responsibilities
A lower initial premium may still be attractive, but it should be weighed against the value of having a guaranteed cost.
Is Annually Renewable Term Insurance Bad?
No.
Annually renewable term insurance can make sense in certain situations.
Someone may only need coverage for a short period.
They may expect their insurance needs to change soon.
They may value a lower initial premium.
Or the product may work well for their particular circumstances.
The key is understanding the structure before buying.
A lower premium today does not necessarily mean a lower total cost over time.
Questions to Ask Before Buying Annually Increasing Life Insurance
Before purchasing a policy with premiums that increase over time, consider asking:
- Is my premium guaranteed?
- How often can the premium increase?
- Is the increase based only on my age?
- Can the insurer also change its underlying premium rates?
- Can I see how the premium changes at older ages?
- Does the death benefit stay level?
- What happens if I can no longer afford the premium?
- Does the policy have any cash value?
- If I need the coverage for life, is the premium structure realistic over the long term?
These questions can be much more useful than simply comparing two starting monthly premiums.
Compare the Policy, Not Just the Starting Price
Life insurance is a long-term financial contract.
A policy that costs less today is not necessarily the less expensive option over 10, 20 or 30 years.
Likewise, a policy with a higher starting premium may provide valuable guarantees that are not obvious when looking only at the initial monthly cost.
When comparing life insurance options, consider:
- how long the premium is guaranteed
- how and when the premium can change
- how long you expect to need the coverage
- whether the policy will still be affordable later in life
- whether replacing the insurance could become difficult in the future
The goal is not simply to find life insurance that is affordable today.
The goal is to choose coverage that still works when you need it.
Need Help Comparing Life Insurance Options?
Life insurance policies can look similar on the surface while having very different premium structures and guarantees.
At LifeSimple, we help Canadians compare life insurance options and understand how the coverage actually works before making a decision.
You can request a quote or speak with a licensed advisor to compare your options.
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• Learn how Term Life works
• Does layering Term Life make sense in Canada?
• Why combining Term & Whole Life can make sense
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