Life Becomes ART. But you probably won't be a fan.

Level term life insurance is widely considered a smart choice for most life insurance consumers. Large amounts of protection can be purchased for a modest sum. You’re also offered some degree of control with respect to the length of time that your premium is guaranteed to remain fixed and level. Insurers typically offer level term periods, in 5-year increments, beginning with 10 years and maxing out at thirty.  In other words—it’s cheap and it does the job. But what happens to a level term policy when the level term period expires? Let’s take a look…

At the ages of 36 and 39—Samantha and James decide to purchase term life insurance policies with level term periods of 20 years. They have 3 young children and their McEvoy Insurance agent pointed them in a wise direction. In order to maximize their protection and minimize their expense, here’s how their agent helped them apply:
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James:
Benefit Amount:                              $600,000
Level Term Period:                          20 years
Annual Premium:                             $596
Approved Health Classification:   2nd best tier                      

Samantha:
Benefit Amount:                               $400,000
Level Term Period:                           20 Years
Annual Premium:                              $226
Approved Health Classification:    Best possible tier

James and Samantha’s agent helped them find the magical intersection of cost, benefit amount, and longevity of their guaranteed premium. It’s important to point out that from a nuts-and-bolts perspective—the choices made by this couple may not seem ideal. For instance—their incomes and liabilities may have suggested larger amounts of coverage for a longer period. But “ideal” is a subjective term.  Our agents know that for the promise of life insurance to be fulfilled it needs to be in place when the unthinkable happens and a claim is filed. That’s part of the aforementioned “magical intersection”. If the cost of the formulaic ideal (age, income, and liabilities based) doesn’t match someone’s ability to afford the protection for as long as possible—is it really ideal?  Rational people would argue it’s not. 

In helping James and Samantha refrain from biting off more than they could chew—their agent demonstrated his commitment to protecting his customer’s family. They settled on a monthly expense of around $72 per month for two policies because they knew they were buying something they could afford in good times and bad.  The low cost ensured they would never find themselves in a compromising position. (“Should we buy groceries or stop paying our life insurance premium since we’re both unexpectedly not earning income?”)

So… “ART”.  More accurately—"A.R.T.” This stands for Annual Renewable Term.  It’s what level term life insurance becomes when the level term period expires and it’s either a blessing or an unfortunate consequence of not paying attention to your changing needs for life insurance protection.

If James and Samantha maintain their policies for 20 years and aren’t proactive with respect to exploiting other life insurance ideas and options, they’ll eventually get a letter from their insurance company. They’ll be informed that they can keep their term life insurance in place but the 20 year premium guarantee they received isn’t there anymore. Their new premium will be guaranteed for one year and it’s now mostly uncoupled from the favorable approvals they received and everything else that went into determining their pricing 20 years earlier. If they want to keep their coverage it’s going to be very, very expensive for a year. If they can afford it and want to keep it—they can expect an even higher rate in year 22. And so on (usually until age 95). Just as the name implies—their 20 year level term policies have morphed into policies that renew on an annual basis with premiums that increase each year based on their adjusted ages. And since declining health is inevitable it is also assumed when the cost of A.R.T. is considered.
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When a level term life insurance policy is issued by an insurance company—they provide a schedule of maximum premiums you’ll expect to pay when your level term premium guarantee ends. It’s done this way because costs are constantly being adjusted over time based on changing life expectancies, new health data, market performance, etc.  Although you can’t be certain your premium will be the maximum specified—you can be sure it will be significantly higher than what you had been paying as you enjoyed 20 years of cozy, manageable premiums.  How much higher could it be?  Let’s compare the annual premium for years 1-20 to the potential annual premium for Annual Renewable Term in years 21-25:

Surprised? People who are unaware of this level term life insurance feature are often unpleasantly caught off guard when this happens. It’s a cautionary tale. We hear way too often about agents promising their customers that they can keep their policies until the ripe old age of 95 without telling them that it would be ridiculous to do so. It’s simply not affordable. In fact—when you look at the Annual Renewable Term premium in the year following the end of level term period—you’ll see that cumulative costs associated with the first 20 years of policy ownership are roughly equivalent to the premium for a just a single year of A.R.T. 

Under what circumstances would you consider yourself blessed to have the option to continue paying these high prices? It’s conceivable that someone diagnosed with a very serious illness would be grateful for the option to maintain protection a bit longer at just about any price. If you find yourself unable to qualify for something new, can afford very high premiums a while longer, and absolutely need the protection—maintaining your policy as A.R.T. may be the only move available. You might be pleased to have something instead of nothing.

In year 20—how will James and Samantha feel about the magical intersection of factors that once guided them to their current policies?  That’s a question best answered after the passage of time and it will involve regular conversations with their agent.

Annual Renewable Term isn’t the only move you have as you age and life throws you a variety of pitches.  Your agent can help you decide what to do and when to do it as long you keep your head in the game. You could buy additional policies as supplementary protection, start over with something entirely new, or you could choose to take advantage of your policy’s conversion option as well.  Generally—by evaluating your options consistently and often (and sooner rather than later) you can rest assured you’re doing everything right for those who depend on you.

Live an artful life by thoughtful design… but don’t allow your life (insurance) to become A.R.T.