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Compare 5-year term life insurance policies
Ideal for covering short-term financial needs, like a business loan or your last few years until retirement
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Term life insurance is flexible and affordable, and provides protection for a set period of time. Some insurers sell five-year term policies, which are ideal for those with short-term, temporary financial needs — such as a mortgage or business loan — or seniors inching toward retirement. But it’s a rare offering.
How much is 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.
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.
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Do I need 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.
The most common reasons to purchase a five-year policy include:
- 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. When you’re in a better financial position, you can consider buying a longer policy.
- Pay off debt. If you have five years left on your mortgage, credit cards or student loans, you may only need five years of coverage. This will ensure your family won’t be saddled with those repayments if you die.
- 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.
- 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 in the meantime.
- Supplement your existing policy. 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’re now underinsured. You can ladder your life insurance by purchasing an additional policy to cover the excess.
- Secure a 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.
- 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, or use the policy to fund a buy-sell agreement in case one of your business partners or shareholders dies.
- Ladder policies. Many policyholders ladder their life insurance and use a five-year policy to cover their short-term needs, even if you don’t know where you’ll be 10, 15 or 20 years from now. You can take out another policy if you find you have more long-term needs in the future, such as if you buy a home or have kids.
Who shouldn’t get a 5-year term policy?
- You’re in a dangerous job or required to get life insurance as part of a divorce decree. You might want to take out an annual renewable term policy instead of a traditional 5-year 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.
- You have more than 5 years left on your mortgage. If you have a mortgage that won’t be paid off in the next 5 years, consider purchasing enough coverage to last until it’s paid off, such as a 15-year term or 20-year term. Unfortunately, your debt doesn’t die with you, so your family will be responsible for those repayments should you pass.
What happens after the 5-year term is up?
Your coverage expires with your policy. You’ll want to reassess your life insurance needs after your policy ends, here are the paths you can take:
- Renew the policy. Do the math to determine whether you still need coverage. If you’re under 70 and still have financial responsibilities, you can opt to purchase a new policy before yours expires. 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. Before signing the dotted line with your current company, it’s a good idea to shop around for the best life insurance rates.
- Convert the policy. Most term policies have a conversion feature. If yours does, you can upgrade to a permanent policy, such as whole life or universal life — before a deadline. Though permanent policies are more expensive, they never expire. They also have an investment component, which suits 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.
What’s 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, 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.
Bottom line
If you have people relying on your income, a term policy is an affordable way to protect your family. While five-year policies aren’t readily available, they 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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