Life insurance policies come in many different types, and one that has become increasingly popular is renewable term life insurance. This policy provides coverage for a specific period, usually 10 to 30 years, and allows the policyholder to renew the coverage for another term without the need to go through the underwriting process again.
This can be a convenient option for people who want the flexibility to adjust their coverage as their needs change. However, like any insurance policy, renewable term life insurance has its pros and cons.
In this article, we will look at the benefits and drawbacks of renewable term life insurance to help you determine if this type of policy is right for you.
Contents
Pros of Renewable Term Life Insurance
Flexibility
Renewable term life insurance policies provide a great deal of flexibility to policyholders. Unlike permanent life insurance policies, which are designed to provide coverage for the policyholder’s entire life, renewable term policies can be customized to meet the specific needs of the policyholder. For example, if a policyholder only needs coverage for 20 years, they can purchase a renewable term policy with a 20-year term.
This flexibility allows policyholders to tailor their coverage to their unique needs and goals without paying for coverage they don’t need. Additionally, renewable term policies typically offer a level premium, meaning the premium stays the same throughout the policy term.
This can make it easier for policyholders to budget for their insurance premiums and avoid unexpected rate increases.
Affordability
Renewable term life insurance policies are typically more affordable than permanent life insurance policies. This is because renewable term policies only cover a fixed period, whereas permanent life insurance policies provide coverage for the policyholder’s entire life.
As a result, renewable term policies have lower premiums, making them more affordable for people on a tight budget.
Convertibility
Many renewable term life insurance policies come with a conversion option, allowing the policyholder to convert the policy to a permanent life insurance policy without going through the underwriting process again.
This can be a valuable option for policyholders who want the flexibility of a renewable term policy but may need permanent coverage in the future.
No Medical Exam Required
Many renewable term life insurance policies do not require a medical exam. This can be a great option for people with health issues or concerns about the underwriting process. However, it’s important to note that policies that don’t require a medical exam may have higher premiums than those that do.
Cons of Renewable Term Life Insurance
Limited Coverage
Renewable term life insurance policies provide coverage for a fixed period, meaning the policyholder may outlive the coverage. If the policyholder wants to continue coverage beyond the term, they will need to renew the policy or purchase a new one. This can be a drawback for people who want coverage for their entire life.
Increasing Premiums
Renewable term life insurance policies typically have increasing premiums. This means that the premiums will increase as the policyholder gets older. While this can make the policy more affordable in the short term, it can become expensive over time, especially for older policyholders.
Limited Convertibility
While many renewable term life insurance policies come with a conversion option, the conversion options may be limited. For example, the policyholder may only be able to convert the policy to a permanent life insurance policy within a certain time frame or age. This can limit the flexibility of the policy and may not provide the policyholder with the coverage they need in the long term.
No Cash Value
One of the drawbacks of renewable term life insurance policies is that they do not have a cash value component. This means that, unlike permanent life insurance policies, renewable term policies do not accumulate cash value over time. As a result, policyholders cannot borrow against the policy or use it as an investment vehicle.
While some people may prefer the simplicity of a life insurance policy that only provides coverage, others may want a policy that offers both coverage and an investment component.
Permanent life insurance policies, such as whole life or universal life insurance, offer this dual benefit, as they accumulate cash value over time, which policyholders can borrow against or use to supplement their retirement income.
However, it’s important to note that the investment component of permanent life insurance policies typically comes with higher premiums than renewable term policies.
The investment component may not provide the same returns as other investment vehicles, such as mutual funds or stocks.
Conclusion
Renewable term life insurance can be a great option for people who want flexibility, affordability, and no medical exam requirement. However, it’s important to consider the drawbacks, such as limited coverage, increasing premiums, limited convertibility, and no cash value component.
Therefore, before deciding on a life insurance policy, it’s important to evaluate your needs, goals, and budget and consult with a trusted financial advisor to ensure that you make an informed decision.
