Guide to 5-Year Term Life Insurance

TL;DR: Is a 5-year life insurance term right for me?

A 5-year life insurance policy may be the right term length for you if: 

• You expect to retire within 5 years 
• You have a mortgage or other major debts that will be paid off in 5 years
• Your children will be financially independent within 5 years

Our take

A 5-year term life insurance policy isn’t for everyone, but it can be a great way to avoid paying for more coverage than you need if your financial obligations are short-term.

5-year term life insurance rates in Canada

The cost of a term life insurance policy can vary considerably based on your age and coverage amount. While a 5-year term may be as little as $10 a month or less if you’re under 35, even small amounts of coverage can carry higher premiums for applicants in their 40s and beyond. 

Remember: 5-year terms are best for short-term debts and financial protection that you only need for a short period of time. Consider carefully whether your expected life insurance premiums are a good price for that short-term security. 

The price of a 5-year term also depends heavily on the size of the death benefit you select for your beneficiaries. The amount of coverage you buy should reflect your loved ones’ expected financial needs in the event of your death. Even with temporary coverage, your policy’s payout should be able to cover your debts, your children’s education (if any), and replacement of your income for any dependents, including your spouse.

Who should choose a 5-year life insurance term?

If you find yourself in one of the following situations, you may want to request life insurance quotes for a 5-year term policy. 

A 5-year term might not be the right choice if…

• You have young children
• Your mortgage payments will last for more than 5 years
• You don’t have any dependents
• Your expected premium payments outweigh the policy’s potential payout

A 5-year term is one of the shortest term lengths available from most Canadian life insurers. If you’re considering such a short term, it’s also worth considering that you may not need life insurance at all. Depending on your situation and the premiums you’re eligible for, you could be better off investing the funds to provide for your final expenses and offer financial security to your family. 

How to choose a term length: 5 vs. 10 years

A 5-year term life insurance plan isn’t right for everyone. When choosing between term life insurance coverage options, keep the following factors in mind: 

• Length of financial responsibilities: When do you expect your children or other dependents to be financially independent? When will your mortgage be paid off? Pick the term length that’s closest to your financial goals without undershooting.  
• Affordability: Your annual premiums will be lower for a shorter life insurance term. 
• Laddering: If you expect some of your financial obligations to significantly outlast others, buying a 5-year term policy alongside a separate policy for a longer term can help you stack the right coverage amounts against your changing financial situation. 
• Eligibility: Depending on your age, you may not be eligible for longer terms without purchasing a permanent life insurance product. But if you’re looking for short-term life insurance without a cash value component, a permanent policy may not be the best fit. 

How to choose a coverage amount

If you pass away while your term policy is active, term life insurance pays a tax-free lump sum to your loved ones upon your death so that you don’t leave them with undue financial burdens—but just how big does that lump sum need to be? 

In general, you should buy enough life insurance to cover your debts, your income, your mortgage payments (if any), and your children’s education (if any). Adding these basics up can give you an estimate of the coverage amount you need to buy. You can also use PolicyMe’s free online life insurance calculator to see a range of coverage amounts that might fit your family’s financial needs. 

Riders and options (and when they’re worth it) 

In addition to the basic coverage included in your term life insurance policy, you may be able to add certain riders or endorsements to your policy: 

• Convertibility rider: Allows you to convert a term life insurance policy into a permanent life insurance policy—such as a term-to-100 policy—for lifetime coverage. 
• Accelerated death benefit rider: Allows you to access some of your death benefit early if you’re diagnosed with a terminal or critical illness. 
• Child rider: Provides term life insurance for your children. 
• Return of premium (ROP) rider: Returns all of the insurance premiums you paid over your policy term if you outlive the policy. 
• Guaranteed insurability rider: Allows you to buy more coverage in the future without the need for updated underwriting (including medical exams). 

Our take

Riders may sound good, but they typically add to the cost of your policy without offering much additional value. All PolicyMe term life insurance policies include two of these benefits at no added cost: $10,000 of child life insurance coverage and the option to convert to a permanent policy later on.

What happens when the 5-year term ends? 

When your 5-year life insurance term ends, so will your coverage—unless you extend the term or purchase a new policy. 

You’ll have a few options when that time rolls around: 

• Renew the policy: Extend your initial term for longer coverage. Depending on the policy you chose, you may have the option to renew your coverage without a new medical exam. 
• Let your policy expire: If you no longer have financial obligations requiring life insurance, you have the option to let your policy end without purchasing or extending new coverage. 
• Buy another policy: Let’s say you can’t renew or extend your coverage, but you still want life insurance. Buying a new policy could be more expensive than other options, but it may allow you to access different types of life insurance, such as universal or whole life.

FAQs: 5-year term life insurance