Typically, life insurance is a product that you intend to keep for many years — often decades or more. But there may be instances when you need coverage only for a short period of time. If you’re in that situation, you may be wondering, what is the minimum period of life insurance?
While most life insurance is designed to be in place for many years, that doesn’t mean you can’t purchase coverage for a shorter time period. Ultimately, the minimum period for life insurance is however long you pay for coverage, whether that’s a few months, one year, five years, etc.
That said, life insurance is typically sold for longer terms for a reason: It’s meant to protect your loved ones or other important people in your life from unknowns that could threaten their financial stability should something happen to you. Typically that’s not a short-term proposition.
Below is a look at some of the common term lengths at which life insurance is sold, as well as how to know whether short-term coverage or long-term coverage makes sense.
Common life insurance term lengths
Life insurance comes in two main varieties: Permanent life insurance and term life insurance.
Permanent life insurance, which includes whole life insurance, does not expire as long as you continue to pay your premiums. In this sense, permanent and whole life insurance are designed to last your whole lifetime, guaranteeing a death benefit no matter when you die. In addition, these types of life insurance accumulate cash value that grows in a tax-advantaged way and is available for you to access throughout your life. The combination of the death benefit and cash value make permanent life insurance a unique part of a broader financial plan.
Term life insurance, as its name implies, only lasts for a given term, or period of time. That could be for a number of years like 10 or 20 years or until you reach a certain age, like 80. Sometimes term insurance is level, meaning the premiums remain the same each year for the duration of the policy. Other term insurance policies change in price each year as you age.
When does short-term coverage make sense?
While life insurance is typically something you have for a long time, there are situations where a short-term policy may make sense. One example may be a business owner who takes on a short-term loan. The lender might require the borrower to carry enough life insurance to cover the loan amount. In this sense, carrying term life insurance for one or two years might truly be all that is required.
In this case, you may be able to get a short-term policy that’s designed to last for a year or less. Or you could just get a term insurance policy that’s priced each year based on the age of the person who will be insured. Once the insurance is no longer needed, you could cancel the policy.
Why a longer term may be better
Outside the specific business example listed above, you’ll most likely find that life insurance is something you need for an extended period of time, or potentially your whole life.
The first benefit is logistics: If you have a short-term policy and it expires or lapses, if you ever need coverage in the future, you will need to go through the entire underwriting process again. This means completing the application form, submitting to the health examination, etc., to get coverage.
The second benefit is that you don’t need to worry about your insurability. When you purchase life insurance coverage, your policy is based on your health at the time that you apply. If you purchase a short-term policy and then need to renew, a new policy may be more expensive or denied altogether if your health changes. With longer term policies or permanent life insurance, you will not be subject to additional exams.
Finally, permanent life insurance offers its own unique benefits compared to even the longest term policy. This makes permanent life insurance a powerful tool that goes beyond just a death benefit — it becomes a financial tool that you can use throughout your life.
A financial advisor can help you understand your options and guide you to the solution that makes the most sense for your financial situation.