What Is Short-Term Life Insurance? (And How Does It Work?)

 

What Is Short-Term Life Insurance? (And How Does It Work?)

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If you’re looking for life insurance coverage, you may have come across short-term life insurance. This type of policy can be a good option if you need coverage for only a limited time, such as while you’re paying off a specific debt or starting a new business.

What Is Short-Term Life Insurance?

Short-term life insurance is a type of term life insurance policy. Short term life insurance provides a fixed rate for a specific period—such as one a year—although some companies offer short-term policies of up to five years.

Short-term life insurance is often used to fill a gap in coverage while you’re waiting for a long-term policy to take effect or to provide coverage during a life transition.

How Does Short-Term Life Insurance Work?

Short-term life insurance policies work similarly to other types of life insurance policies in that you pay premiums in exchange for coverage. As long as the policy is in force, your beneficiaries are paid a death benefit when you pass away. The main difference is in how long the policy lasts, but there are some other differences, too.

Duration. Short-term policies typically last for a year, although some policies go up to five years. Traditional term life policies are usually available in lengths of 10, 15, 20, 25 or 30 years.

Premiums. Premiums are typically cheaper than permanent life insurance policies because they don’t come with a cash value component. Like traditional term life policies, premiums for short-term policies remain the same throughout the level term period. If the policy you have is renewable, expect premiums to increase significantly each time you renew.

Renewal. Whether or not the policy is renewable depends on the type of short-term life insurance you have.

Underwriting. Short-term policies often have simplified application and approval requirements, so you may not need to undergo a medical exam or provide extensive health information.

What Are the Different Types of Short-Term Life Insurance?

Any life insurance policy can be short-term if you decide you no longer want the coverage and stop paying for it. But it’s usually more cost-effective to buy a policy specifically designed to last for a shorter period of time if your coverage need is short-term.

Here are some common types of short-term life insurance.

Annual renewable term life. It gives you the flexibility to renew each year you still need coverage. It can be a good option if you think you’ll only need coverage for 12 months but want the option to extend the policy if necessary. Rates will increase with each renewal.

A term life policy that is one year in length. This policy is 12 months long and can’t be renewed. If you need coverage after one year, you must buy a new policy.  Progressive (via Fidelity Life), Brighthouse and Principal offer one-year term life insurance policies.

A five-year term life policy. While many life insurers start their term lengths at 10 years, some offer five-year term life policies. For example, Haven Life offers a five-year term life option with its Haven Simple policy.

Annual Renewable Term Life Insurance

Annual renewable term life insurance policies provide coverage for one year at a time, with the option to renew the policy each year. Premiums will increase each year, but these policies can be a good option if you need coverage for a short period of time and want the flexibility to renew the policy each year.

Sellers of Annual Renewable Term Life Insurance

If you’re looking for companies that sell annual renewable term life insurance, this list is a good place to start:

American National – ANICO Signature Term ART policy

Equitable – ART policy

New York Life – Yearly Renewable Term policy

Ohio National – YRT Plus II policy

Securian Financial – Convertible Annual Renewable Term (CART) policy

USAA – Essential Term policy

Pros and Cons of Short-Term Life Insurance

Before you buy a policy, consider the advantages and disadvantages of short-term life insurance.

Pros

Affordability. Short-term life insurance policies are generally less expensive than permanent life insurance policies because they don’t build cash value and are in force for a shorter period of time. If you have a renewable short-term policy, however, premium increases can add up quickly if you choose to renew each year.

One premium. In most cases, you pay one annual premium upfront for a one-year policy. You don’t have to worry about the policy lapsing due to missed payments.

Quick approval. Short-term life insurance policies are often simplified issue life insurance policies, which means you may be able to get approved for coverage quickly.

Cons

Can get expensive. The premium you pay for the policy is based on your age at the time of renewal. So if you misjudge your insurance needs and end up renewing each year, it would have been far more cost effective to buy a longer term life policy, such as 10 years or longer.

Not always renewable. Some types of short-term life insurance policies aren’t renewable at all. Others may have a cap on the number of times you can renew. For example, Equitable offers two short-term policies: an annual renewable policy that has a cap of three years and a one-year policy that’s nonrenewable. Ohio National’s short-term policy has a cap of 10 years.

No cash value. Short-term policies don’t build cash value over time. This means you can’t borrow against the policy or use it for cash accumulation like you can a cash value life insurance policy.

How Much Does Short-Term Life Insurance Cost?

You can get a $50,000 one-year term life insurance policy from Progressive (via Fidelity Life) for as little as $7 per month for males ages 30 to 32 and females ages 39 to 41 who do not use tobacco. If you are younger than this, the policy may be even cheaper.

There are a few factors that play into how much you pay for short-term life insurance.

Age. The younger you are, the lower your premiums will be.

Coverage amount. The more coverage you need, the higher your premiums.

Health. If you’re in good health, you may be able to get lower rates. However, if you have a pre-existing medical condition, you may pay higher premiums or be denied coverage altogether.

When Does Short-Term Life Insurance Make Sense?

Short-term life insurance may be worth it in these situations.

You’re between jobs. If you’re between jobs and don’t have coverage, short-term life insurance can provide coverage until you find a new job with group coverage, or buy coverage independently.

You’re making positive lifestyle changes. If you’re in the middle of quitting smoking, or other lifestyle changes that will improve your health (and life insurance rates), a short-term policy can provide coverage until you’re ready to buy a policy with a longer duration.

You need coverage for a short-term debt. If you have a specific need for life insurance coverage for temporary debt protection, short-term life insurance can be a good fit.

How to Choose a Short-Term Life Insurance Policy

As you shop around for short-term life insurance, consider these factors.

Coverage amount. Make sure the policy provides the right amount of coverage you’re looking for. Even short-term life policies can have minimum coverage amounts of $100,000 or more.

Coverage length. Determine how long you need coverage—whether it’s one year or up to five years—and choose a policy that matches that timeframe.

Price. Look for the most affordable option that meets your coverage needs.

Renewability. Check if the policy can be renewed and if there are any limitations on how many times it can be renewed.

Which Companies Offer Short-Term Life Insurance?

You can find short-term life insurance policies from these companies.

Progressive and Fidelity Life – RAPIDecision Life One

Brighthouse – One Year Term

Principal – One-Year Term

Equitable – TermOne policy

Haven Life – Simple 5-Year Term policy

Compare Life Insurance Companies

Compare Policies With 8 Leading Insurers

Temporary Life Insurance

Temporary life insurance is different from short-term life insurance and is designed to cover gaps in coverage while you wait for approval of another policy.

When you apply for a life insurance policy, the insurance company will typically require you to undergo a medical exam and provide other information about your health and lifestyle. This process can take several weeks or even months to complete, during which time you may not have any coverage in place.

To address this gap in coverage, some insurance companies offer temporary life insurance that can provide protection for a limited period of time, such as 30 or 60 days, while you wait for approval.

Short-Term Life Insurance FAQs What is the difference between short-term and long-term life insurance?

Longer term policies—such as whole life insurance—usually have more features, like the option to build cash value and add riders. For the most part, short-term policies provide a guaranteed death benefit and not much else.

Can you cash out short-term life insurance?

No, short-term life insurance policies do not have a cash value and therefore cannot be cashed out. These policies are designed to provide a life insurance death benefit to your beneficiaries in the event of your death during the policy term. If you outlive the policy term and don’t renew, your coverage expires and you do not receive any payout.

Is short-term life insurance worth it?

Short-term life insurance can be worth it if you need coverage for a short period. For example, if you have a mortgage or other debt that will be paid off soon, a short-term policy can provide coverage during that time. However, if you need coverage for a longer period, a traditional life insurance policy is likely a better option.

What is the shortest-term life insurance policy?

The shortest-term life insurance policy is one year. These policies may be renewable for up to 10 years for higher rates at each renewal, or you may have the option to convert them into a different type of life insurance.

Why is short-term life insurance so cheap?

Short-term life insurance is cheaper than longer-term insurance because it has fewer features. Short-term policies are not cash value life insurance policies, so they do not build cash value. They may not have rider options and may have lower coverage amounts than regular life insurance policies. The cost of a short-term policy is also lower because it covers a shorter period of time.