In this article I’ll cover what options you might have if you need to get short term life insurance, and when short term life insurance might be a good option. I’ll also explain what I mean when I say ‘short term’ and give examples of pricing - comparing short and longer term life insurance options. If you want to get term life insurance quotes you can do so with our quote tool right below this paragraph. Otherwise, keep reading for more information on short term life insurance.
When you buy a term life policy, the policy has a set “term” – typically with a level price throughout the term period. Typical term life policies will usually be 10,15,20,25, or 30 years. Your age, and reason you are getting a life insurance policy, as well as price will typically determine the length of term that you choose.
Besides the term periods just mentioned there are other options when it comes to term life insurance, annual renewable term (also called Yearly Renewable Term or 1 Year Level Term) and 5 year term life insurance.
Unlike level-term life insurance policies where the price does not change for the length of the term, Annual Renewable Term life is life insurance where the price increases each year with age. A 10 year term policy for example charges the same rate each year based on the average age of the individual over those 10 years. Since an Annual Renewable Term does not do that, an Annual Renewable Term Policy would be initially cheaper in price than a 10 or 20 year level term. However, yearly renewable policy does cost more each year and should only be used to save money when the need for life insurance is for a short period of time.
Let’s say you are borrowing money from a bank – the bank very often requires a life insurance policy on your life in case you die and still owe money on the loan. If the loan is short term – let’s say 3 years – then you may save money by purchasing a yearly renewable term, as opposed to a 10 year term.
Recently I insured a 78 year old man who was borrowing money from a relative and intended to pay the loan back over a 2 year period. The relative requested that the 78 year old man buy a life insurance policy – this way if the 78 year old man died, the relative would get their money back from the life insurance death benefit. In this example the $100,000 policy cost $1,532 with Annual Renewable Term, as opposed to $5,077 for a 10 year term. At age 79 the yearly renewable term would increase from $1,532 to $1,742 and the 78 year old man would no longer need a policy after that because the loan would now be paid off. Over a 2 year period he is paying $3,274 total, as opposed to $10,154 – a savings of $6,880!
An annual renewable policy may also make sense in other instances. Since it is cheaper in the earlier years of the policy than level term insurance, it can be more affordable for someone that needs a bigger life insurance policy. For example a married medical student knows that he will have a high future income and wants to protect his family with a $1,000,000 life insurance policy – however, right now he is in school and doesn’t have much money – in this case the medical student can buy a yearly renewable policy and once he starts working and earning more money, switch to a 20 or 30 year level term life insurance.
In most cases I recommend that you consider a level term policy over an annual renewable policy, however if your life insurance needs are short term, considering yearly renewable term might be an option that makes sense.
Have you ever heard of 5 year term life insurance? Possibly not, because not too many life insurance companies offer 5 year term life insurance rates as an option. However there are a handful of companies that do offer this option, one being Minnesota Life.
Since only a handful of life insurance companies offer a 5 year term life option, rates for this term period tend not to be very competitive. Surprisingly, you will find if you compare 5 year term vs 10 year term life rates, that typically a 10 year term policy will be cheaper than a 5 year policy. It doesn’t really make common sense, but because there isn’t too much competition among 5 year term life insurance offerings, the rates tend to not be very competitive.