Ideal for covering short-term financial needs, like a mortgage or business loan.
Term life insurance has a long list of benefits. It’s flexible and affordable, and usually comes in 10, 20 or 30 year terms, so you can select the coverage you need — no more, no less. In some situations, providers offer a five-year policy that could be a perfect fit for your life.
It’s ideal for those with short-term, temporary financial needs, such as a mortgage or business loan, or seniors inching toward retirement. While it isn’t as popular as 10-year policies, the golden rule with life insurance is to only purchase as much as you need.
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Why we like: Policygenius
Companies that offer term life insurance
What is the typical cost of a 5-year term life insurance policy?
Life insurance rates vary from person to person. The premium you pay is a product of your age, health, lifestyle, occupation and family medical history, and the length of your term. Generally, the younger and healthier you are, the cheaper your rate is.
In most cases, the longer the term, the more you’ll pay. However, only a handful of life insurance companies offer a five-year term, as the cost of writing the policy often outweighs the return of investment. As a result, you may find that you can get a better deal on a 10-year policy.
With term life insurance, your premium is locked in for the life of the policy. To score the best possible rate, apply for life insurance as soon as you need it.
What is my risk of dying in the next 5 years?
When writing your policy, life insurance companies first consider your age and health. The reason is far from subtle: They know the older you are, the more likely they’ll have to pay out your policy.
To determine your rate, underwriters look at life expectancy data.
Let’s use a 60-year-old policyholder as an example.
According to our research, the average 60-year-old man’s risk of dying in the next five years is 6.37%. For a woman, it’s a little lower at 3.84%.
To put this into context, it helps to look at these figures next to the average life expectancy in the US. A man who hits his 65th birthday can expect to live until 84.3, while a woman is likely to live until 86.6. These are average numbers — around a quarter of 65-year-olds will reach the age of 90.
How much life insurance do you need?
Answer three questions to see the coverage we recommend.
1) How much debt do you owe?
Include mortgages, credit cards, car loans, student loans and other debt.
2) How much do your loved ones need each month?
Start with how much you take home monthly, adding rent, food and necessities.
3) How many months will your loved ones need the income?
Indicate how long you think your loved ones need before they can sustain themselves in your absence
Your recommended coverage:
$50,000
Typically you'll want to add another $15,000-$20,000 for final expenses such as medical costs and funeral expenses.Who should buy a 5-year policy?
Ideally, your life insurance policy should cover your longest financial obligation. If you have short-term, temporary needs, a five-year term may be the right fit.
In general, this term makes the most sense for those who are reaching retirement age and those laddering life insurance policies to secure loans, supplement their income and protect their businesses.
These are the most common reasons to purchase a five-year policy.
- To protect your income. Do you have dependents relying on your income? A five-year policy can protect your family’s financial future while you work toward increasing your income and paying off any debts you may have, like a student loan. If you die, your policy provides your family with the money they need for daily living expenses and may also cover your remaining debts and funeral expenses. When you’re in a better financial position, you can consider buying a longer policy.
- To pay off debt. If you’ve crunched the numbers and realized you have five years left on your mortgage or loans — like credit cards or student loans — you may only need five years of coverage. Along with security, this policy makes sure your family won’t be saddled with those repayments if you die.
- To cover your kids’ college costs. Most people purchase a policy that expires when their children have graduated college and started working and earning their own money. If your kids will enter the workforce in five years, this term may suit you. If you die, your policy will kick in to pay for their college education.
- To plan for retirement. Five-year policies are popular among seniors in their late 50s and early 60s who are counting down the years until retirement. At this stage of your life, you’re probably in a comfortable career position and contributing more money to your savings accounts and 401(k). A term policy can protect your income and help pay for any financial needs that pop up, such as buying a second home or enrolling your adult child in graduate school.
- To supplement your existing policy. As we age, our financial situation and obligations change — and you should adjust your life insurance policy to match. Let’s say you proactively bought a 25-year policy when you were younger. It’s 15 years later, and you now have a bigger mortgage, a business or more kids, and you realize you’re underinsured. You can ladder your life insurance by purchasing an additional policy to cover the excess.
- To secure a loan. Are you applying for a personal or business loan? Boost your chances of approval by taking out a life insurance policy that covers the period of the loan. This reassures lenders that you have every intention of paying back the money, even if you die.
- To protect your business. If you’re a business owner or partner, you can use a five-year term life policy for business purposes. You can buy key employee insurance, which protects your most valuable employees and offers the company a sense of security and much-needed cash flow should they die. You might also use a five-year policy to fund a buy-sell agreement, just in case one of your business partners or shareholders dies.
What happens if my policy expires?
Your coverage expires with your policy. Like most types of insurance, life insurance offers protection for the worst-case scenario — so reaching the end of your term is actually a good thing. It means you’re alive and hopefully well.
When your five-year policy expires, these are the paths you can take:
- Renew the policy. Do the math to determine whether you still need coverage. If you still have financial responsibilities, you can opt to purchase a new policy before yours expires, if you’re under the age of 70. It doesn’t have to be a five-year policy; you can choose a longer term or explore annual renewable term insurance, which covers you for a year. Either way, you’ll have to reapply and prove you’re insurable, meaning you may need to take another medical exam. Your new premium reflects the current market rate and your age and health, so just know that it will be higher.
- Convert the policy. Most term policies have a conversion feature. If yours does, you can upgrade to a permanent, cash-value policy, such as whole life or universal life — often without having to provide extra evidence of your insurability. Ask your provider about its requirements. Though permanent policies are more expensive, they never expire — as long as you pay your premiums. They have an investment component, which is ideal for those who want to use their life insurance for financial and estate planning.
- Let the policy lapse. If you don’t need coverage anymore, you can cancel the policy without penalty. Usually, no action is needed on your part.
Renewing your policy? Before signing the dotted line with your current company, it’s a good idea to shop around for the best life insurance rates.
Should I choose a longer or shorter policy?
It depends on your financial situation, family and the stage you’re at in your career. Your life insurance policy should cover your longest or most expensive financial obligation, or take you up until your retirement. If you die prematurely, your policy covers your debts and give your family the money they need to live.
You may not know where you’ll be 10, 15 or 20 years from now, but it’s easier to gauge your financial needs five years into the future. That’s why many policyholders ladder their life insurance and use a five-year policy to cover their short-term needs.
One case where you might need a shorter policy
You might want to take out an annual renewable term policy if you need life insurance as part of a divorce decree or if you’re temporarily doing a dangerous job, such as mining. The policy can remain in force for as long as you’re dealing with a higher risk of death.
One case where you might need a longer policy
If you have a 10-year mortgage, you should purchase a decade’s worth of coverage. Unfortunately, your debt doesn’t die with you, so your family will be responsible for those repayments should you pass.
Bottom line
If you have people relying on your income, you may want to look into life insurance — and a term policy is a flexible and affordable way to protect your family. While five-year policies aren’t readily available, they do make sense for those who have short-term financial obligations. They’re also popular among seniors edging closer to retirement and business owners who are trying to secure loans and key employee insurance.
Check out our guide to life insurance to compare providers and find the policy that best meets your needs.
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