Red Hot Tips Point: 5 Year Term Life Insurance

Sunday, October 11, 2009

Term life insurance periods can are available to address all types of scenarios. The range is usually from 5 years up to 30 years in 5 year increments (i.e. choice of 5, 10, 15, etc). Let's look at what it typically the lowest available amount of term on the market. When does a 5 year term period make sense?

First, let's look at the purpose of life insurance to properly orient ourselves for the use of 5 year term. Usually, term life insurance is used to replace income over a period of time. This would be true if you are a new family just starting out or have young children. 5 year term is probably not the right fit for this situation. 5 year is usually situational specific which means it is to cover some other event that will last up to 5 years. Let's look at some example.

Let's say you are 45 years old and your children are just about to leave high school. You figure they will be in college for about 5 years (hopefully these days). You do not have life insurance or your current amount is insufficient to cover the ever-increasing cost of college in the case of your passing. This might be an ideal situation to get a stand-alone or even additional 5 year term life insurance policy to address this specific financial concern. With college costs quickly approaching $100K and more for 4 years, this gives you a sense of the need. The last thing you want to have as a result of your passing is that your children are now unable to continue college or to do under an extreme financial burden. Most likely, they will only have one chance to do college right and a quick shot of 5 year term is a good life insurance policy to make sure it becomes a reality.

Another personal use of 5 year term is to purchase the life policy to cover a period when another earner in the family will stop working for a short duration. This could be following the birth of a child or if that person is setting off to start their own business. Again, this partially assumes that you have other life insurance of a longer duration anyway but the 5 year term at least gets you out past a window of a particular change where the financial burden for the family is shifting more to your shoulders. Assuming there is no impact on underwriting eligibility, 5 year term may also address a change temporary shift in employment or location. Let's say you are taking a contract job that may last 3-5 years in another country.

There are also business uses for 5 year term life insurance policies. For example, you may hire a specialized employee on a contract basis whose ability is critical to the functioning of the company. If the employment contract is expected to last under 5 years, this might be a good insurance policy in the form of a key person insurance plan to cover the finite contract period. You can renew it, assuming the person meets eligibility requirements and at a higher rate, for another 5 years when the current contract is complete.

So basically, 5 year term is good when you either have a personal or business financial responsibility that will last less than 5 years. It's a temporary need. Be careful not to purchase 5 year term for needs that are more long term in nature under the plan of reducing monthly premium and just re-applying at the end of the 5 year window. You may not be able to qualify based on health then and the rate will be more expensive (since you're 5 years older anyway). It's best to lock in a term life length that truly matches your needs and not try to "piece meal" it.