Annual renewable term life insurance in Canada: Costs, pros & cons

Not every insurance need lasts decades. Some Canadians only need coverage for a few years, whether to protect a short-term loan, fill a gap between jobs, or bridge to a longer policy. Annual renewable term life insurance is built for those moments, offering one-year coverage that can be renewed yearly without new medical evidence.

This type of policy is often referred to as art coverage, providing a flexible solution for temporary needs. Its flexibility is also paired with low cost in the initial years, making it attractive for those seeking affordable short-term protection. If the insured person passes away during the term, their beneficiaries receive a death benefit (a tax-free lump-sum payment). While its flexibility is appealing, rising annual premiums can quickly add up if kept long term.

In this guide, we’ll explain how annual renewable term life insurance works, when it makes sense, and what to consider before choosing it.

What is annual renewable term life insurance?

ART is a term life insurance policy (also known as a term life policy) that covers a one-year term. ART life insurance can be renewed at the end of each year without undergoing a medical exam, and policyholders are automatically eligible to renew each year without additional health assessments. Policyholders can choose to renew the policy for as long as they need coverage. Annual Renewable Term life insurance offers financial protection to dependents during the term of the policy.

When applying for ART life insurance, applicants may need to complete a medical questionnaire to determine insurability before the first policy is issued. With ART life insurance, the policyholder pays a much lower annual premium than for permanent life insurance policies, which cover the insured’s entire lifetime.

However, the premium for an ART life insurance policy increases each year upon renewal. Premiums for yearly renewable term insurance typically increase annually as the insured ages, reflecting a higher risk of death. As time passes, the cost of renewing the policy on an annual basis may become prohibitively expensive compared to other forms of life insurance.

How does ART life insurance work?

ART life insurance offers coverage for a specified term of one year

• Policy duration: An ART policy is initially bought for a one-year term and must be renewed by the end of the year to maintain coverage.

• Premium payments: To keep the policy active, you must pay premiums annually, with the amount recalculated each year upon renewal.

• Renewal process: Unlike the initial application, medical underwriting is generally not required. The policy is typically renewed by paying the new premium for the upcoming year.

• Conversion options: Some ART policies allow policyholders to convert their term life insurance into permanent life insurance without undergoing additional underwriting. This could be beneficial if the insured person’s needs or health changes and they want lifelong coverage (also referred to as lifetime coverage).

• No cash value: Annual renewable term life insurance does not accumulate cash value that can be borrowed against or withdrawn while the insured is alive.

Why do premiums increase every year?

When it’s time to renew, the insured has to pay a new yearly premium, and it’s determined by how old they are at that moment, specifically, one year older than when they first got the policy. Premium adjustments typically occur on the policy anniversary, which is the key date for recalculating premiums each year. This happens yearly, and the premium increases as the insured person ages.

• Age-related risk: As the insured person gets older, the risk of mortality increases. The likelihood of death and potential claims also rises, leading to higher premiums to compensate for the increased risk.

• No re-evaluation of health: In ART policies, there is typically no requirement for medical underwriting or re-evaluation of health at each renewal. Since the policy is automatically renewed without considering changes in health conditions, the premium increase helps offset the insurer’s risk of potentially insuring individuals with deteriorating health.

The premiums for the first year of an annual renewable term life insurance policy are initially significantly lower than level-term life insurance for the same coverage amount. However, after subsequent renewals, the total premium paid can be substantial. Compared to other types of term life insurance premiums, ART premiums can increase more rapidly over time due to annual recalculations.

Suppose you continue to renew your coverage beyond the initial few years. In that case, you may eventually reach a point where a 10- or 20-year term life insurance policy would have lower premiums than you currently pay.

How much does ART cost?

The average price for a healthy, non-smoker 35-year-old male purchasing an ART life insurance policy with an initial coverage amount of $500,000 for a one-year term:

• 35 years old: $300 per year

• 36 years old: $325 per year

• 37 years old: $350 per year

• 38 years old: $375 per year

Applicants who qualify for non smoker rates, typically by abstaining from tobacco products for at least 12 months, may pay lower premiums.

As shown in the example, the premium increases incrementally each year. The premium rates may also differ for females or individuals with pre-existing health conditions.

What affects the cost of ART life insurance?

When it comes to the renewal of ART life insurance, the cost is influenced by several factors.

• Age: As the insured individual gets older, the risk of mortality increases, leading to higher premiums. The premium is adjusted yearly to reflect the insured person’s age at renewal.

• Duration of coverage: The length of time the policy has been in force can affect renewal costs. Premiums typically increase yearly, and as the policy has been active for a more extended period, the cumulative increases contribute to a higher renewal premium.

• Insurance provider: Different insurance providers may have varying rate structures and approaches to premium adjustments at renewal. Each insurance company sets guidelines for calculating premium increases based on age bands or other factors. Therefore, the specific insurance provider may affect the cost at renewal.

Why choose ART?

Choosing an ART life insurance policy can offer benefits as follows:

• Short-term coverage needs: ART can be a fitting choice if you have a temporary need for life insurance coverage, such as to protect a specific financial obligation or for a limited period. It allows you to have coverage for one year at a time without committing to a longer-term policy.

• Affordability: The premiums for ART policies tend to be lower in the initial years than those for longer-term policies like level-term insurance.

• Flexibility: ART policies offer flexibility in terms of coverage duration. You can renew the policy annually, allowing you to adapt your coverage as your needs change. This can be beneficial if you need more certainty about your long-term insurance requirements.

• Convertibility options: Some ART policies include conversion options, which allow you to convert the policy to a permanent life insurance policy without undergoing further underwriting or providing evidence of insurability. This can be valuable if your needs evolve and you require lifelong coverage.

• Changing health conditions: If you anticipate potential changes in your health shortly, choosing ART can allow you to secure coverage now without needing to re-evaluate your health at renewal. This can be advantageous if you believe your health may deteriorate, as you can lock in coverage while still in good health.

Drawbacks of annual renewable term life insurance

• Increasing premiums: The premiums for ART policies increase each year upon renewal. Over time, these annual increases can make the policy significantly more expensive than other options like level-term or permanent life insurance. This can become financially burdensome, especially if you plan to maintain coverage for an extended period.

• Lack of flexibility in coverage amount: With ART, premiums increase yearly, but the coverage amount remains the same throughout the policy term. If your insurance needs change over time, such as requiring more coverage to accommodate financial obligations or dependents, adjusting the coverage amount may only be possible by obtaining a new policy.

• Limited conversion window: While some ART policies offer conversion options, there may be restrictions on when and how the conversion can occur. The conversion window might be limited to a specific period or age range, and conversion must occur prior to a specified policy anniversary or age limit. So it’s essential to understand the conversion terms and conditions before choosing an ART policy.

Who should get an Annual Renewable Term Life Insurance?

ART life insurance is generally suitable for individuals with temporary financial obligations such as mortgages or short-term loans. Younger individuals may have limited budgets but still need life insurance coverage.

Is ART right for you?

ART may be right for you if you have short-term life insurance needs and prefer flexibility, but it may not suit those seeking long-term coverage or cash value accumulation. 

Yearly renewable term (YRT) – Conclusion

Annual renewable term life insurance offers flexibility and quick coverage, but it’s best viewed as a short-term solution. Rising premiums make it unsuitable for long-term protection. If you expect to need insurance for several years, a 10- or 20-year level-term plan will likely save you money and simplify budgeting.

To compare both options side by side, get a personalized quote with Oneday. Coverage for eligible applicants is subject to underwriting and provincial regulation.

Frequently asked questions about annual renewable term life insurance

Sources:

1. FSRA, “How to resolve a Life and Health Insurance complaint”