Should You Purchase a Renewable Term Insurance Plan?
Term insurance is a protective instrument and is an indispensable financial lever for your family after you are gone. As the name suggests, term insurance plans are valid for a specified period after which they expire. The policy-buyer is required to purchase a new plan at a higher premium (in all probability) at the end of a term plan.
Providing a way out in this scenario is renewable term insurance. With a renewable term policy, you do not need to re-qualify to buy insurance. The plan allows you to extend the coverage for a set period without going through the drill of a medical exam and verification over and over again.
How Does a Renewable Term Insurance Plan Work?
While most insurance plans are renewable, some insurance policies simply expire at the end of the designated period. In term insurance renewal, the initial contract (usually for one year) is renewed annually or as specified. It guarantees1 coverage for a set number of years as well as a death benefit.
At the end of each term, the policy premium is reassessed and increased for the following year. The plan allows beneficiaries, especially young and healthy buyers, to avail the benefit of lower premiums at the start instead of paying the standard premium in a fixed term plan.
Some also look at renewable life insurance as a short-term solution. With a renewable term policy, your original premium is calculated based on your current age, health, and preferred death benefit. Now your premium may increase year after year; however, you will not be required to re-evaluate your health at the end of the period.
Let us understand this with an example:
Mr Ravi purchases a renewable term insurance plan at the age of 27 with a sum insured of Rs. 1 crore. The coverage extends till the age of 65, and the premium payable is Rs. 10,000 each year. His age and health are verified at the time of buying insurance.
Since Mr Ravi has purchased a renewable term plan, he will continue to have coverage till he attains 65 years of age, as long as he pays his premium annually. The premium amount may be increased each year; however, he will not need to go through a fresh medical examination each year to qualify for the coverage. This also allows him to stay protected if any illnesses arise during the term of the policy, which would otherwise have rendered him ineligible for insurance.
Benefits of a Renewable Term Insurance Plan
Renewable term insurance is a solicited way to stay protected and maintain insurance coverage year after year. Although typically, purchasing a term plan that spans 10 to 20 years with a fixed premium rate could be cheaper, annually renewable term insurance comes with its own set of advantages, as follows:
Premiums start low: In the case of renewable term insurance, the premiums usually start low (depending upon your age and health) as opposed to the fixed premium in other term plans. The amount of premium increases gradually at the time of each renewal. You can easily calculate the term plan premium in a few easy steps.
Stop-gap arrangement: Buying renewable term insurance allows you to place a stop-gap arrangement or secure a short-term solution without committing to a longer-term plan. You can opt for a renewable term policy and change to a traditional policy later.
No need for re-examination: One of the most touted reasons to buy renewable term insurance is that it exempts you from sitting through a medical exam each time to qualify for insurance. This saves you time and energy and allows you to stay protected if uncalled illnesses come up later.
Who Should Opt For A Renewable Term Insurance Plan?
While the decision to buy life insurance should be yours alone, here are the factors that you must consider while purchasing a renewable term plan. It is advisable to buy a renewable policy over a traditional term plan or whole life insurance in case of the following circumstances:
Budgetary constraints: If you cannot afford the premiums in a traditional term plan, it is better to opt for a renewable policy. The premium starts low in the renewable term plans and can be easily afforded for a shorter period.
You are looking for temporary coverage: If you are looking for a short-term solution and do not wish to commit to a whole term plan, a renewable policy could be ideal for you. It allows you to test the waters and deliberate in the interim before going for a traditional term plan.
Your health is improving: If you aren’t in the pink of health at present, buying a renewable plan is better for you. This will allow you to improve your health in the year before opting for a traditional term plan. This way, you can ensure that you aren’t charged a higher fixed premium rate while also staying protected in the meanwhile.
Renewable Term Insurance Vs. Convertible Term Insurance
A renewable term plan is often confused with a convertible term plan. However, there are key differences between the two. While a renewable life insurance policy allows you to extend your coverage year after year, a convertible life insurance plan allows the policyholder to convert his or her current term plan into a whole term plan at any point during his or her existing term.
In both cases, the policyholder does not have to re-qualify or sit for a medical examination (at the time of renewal or conversion). However, note that the renewable life insurance plan cannot be converted into a whole term plan. In contrast, a convertible life insurance plan can be switched to a whole term plan at any point while the policy is active.
Buying a renewable term insurance plan offers several benefits, such as low premium in the initial stages, temporary coverage, and the option to add several levers through the duration of the policy. It is suitable for young buyers who don’t have the money or willingness to buy a traditional term plan. Buy a renewable term plan online with Tata AIA Life Insurance online or click here to know more.