As COVID-19 shutdowns are easing around the country, many Americans are in a period of transition. If you’re in between jobs, strengthening your health, or seeking to pay off debt, a short-term life insurance policy might protect you until your circumstances improve.
How does short-term life insurance work?
The two types of short-term life insurance are annual renewable term (ART) and temporary life insurance.
An annual renewable term (ART) is a one-year policy that renews annually for a certain number of years. That means you may continue your coverage without having to reapply or take a medical exam. Consider it a one-year contract: When the year is finished, you have the option of keeping or canceling your policy.
What’s the catch? ART can become significantly more expensive over time than the typical life insurance premiums for standard term life policies.
The price rises every year because your risk of death increases, says Elaine Tumicki, corporate VP of insurance product research at LIMRA, a trade group for life insurance.
LIMRA’s 2020 U.S. Retail Life Insurance Sales Survey showed that just 6% of term life insurance plans sold in 2020 were ART.
Some insurers offer temporary life insurance, too, to applicants who are awaiting approval for a traditional policy. Regular term or permanent life insurance can take 4 to 8 weeks to get, and the temporary policy allows you to avoid being without coverage.
When should you buy short-term life insurance?
- You are awaiting approval for a long-term life insurance policy.
In case your insurer offers temporary life insurance while applying for a traditional policy, you should accept it. When you pay your first premium, your insurance enters into force and generally offers the same level of coverage as the primary policy you’re applying for.
- You need to cover the short-term debt.
That might be a credit card debt, a personal loan, or a mortgage if you’re near to paying it off. A short-term insurance policy can provide coverage while you’re still in debt, preventing your family from having to shoulder that burden if you die early.
Annual renewable term (ART) life insurance works for new business owners as well. According to John Graves, licensed life insurance agent and founder of G&H Financial Group, if you borrowed money to establish that handicraft business, food truck, or new software company to repay the loan with earnings in the first few years, then ART might be an excellent way to shield your family from that debt if something were to happen to you.
- You’re switching jobs.
LIMRA’s 2021 Insurance Barometer Study found that over half of working Americans obtain life insurance through their jobs. If you need to bridge a coverage gap before returning to work or starting new employment, ART insurance may help. You can terminate your short-term coverage once you can enroll in group life insurance through your new job.
- You have a dangerous temporary job.
If you work in a dangerous environment every day, insurers may charge you a higher rate. If you’re going to be working a risky job (like mining or logging) for a limited time only, then you could be better off with a short-term policy. After you’ve completed that task, you may search around for lower premiums.
- You’re working on your health or changing your lifestyle.
According to Graves, a short-term policy can protect your family while you’re trying to lose some weight, recover from an illness, stop smoking, or otherwise improve your health.
Once you’ve gotten over the hump, you can apply for traditional insurance and possibly get a cheaper premium.
- You have another situation where temporary life insurance is appropriate.
Perhaps you require life insurance as part of a divorce settlement, or your rates for standard insurance are expensive because you’re on probation or have been diagnosed with gestational diabetes during pregnancy. In these situations, short-term coverage may be sufficient to meet your needs without tying you to longer-term insurance.
Alternatives to short-term life insurance
Life insurance is designed to be flexible, which is why there’re so many alternatives available. Consider traditional insurance where short-term coverage is insufficient. Term life insurance, which lasts for a defined number of years, is typically affordable and enough for most families. However, consider a permanent policy, like whole life or universal life insurance, for lifelong coverage.
Tumicki says it’s really up to the individual. Whatever their life insurance need is, they must match it to the policy that meets it.