Term Life Insurance Explained

Term life insurance is life insurance that pays the face value of the policy to the beneficiary upon the death of the insured. The name stems from the fact that the insurance is bought for a specific period or term, generally anywhere from one to thirty years. Term life insurance is the most straightforward type of life insurance: if the insured does not die during the term the insurance is in effect, neither the policyholder nor the beneficiary receive any cash from the policy.Term life insurance differs from whole life insurance in that it does not build cash value. Policyholders cannot borrow against term life insurance, nor can they use term life insurance as an investment vehicle. However, it is much easier to find low cost term life insurance,  so policyholders could invest the savings in monthly premiums themselves; frequently realizing a better return than they would receive by investing in whole life insurance.

Younger adults who have mortgages or other debts, would benefit the most from buying term life insurance. The death benefit would replace the lost of income from the deceased spouse, so anyone who wants to provide for their family in the event of his or her premature death would be a good candidate for term life insurance.

A general rule of thumb is that young adults should have term life insurance equal to 10 to 20 times his or her annual salary. While this may seem excessively high, life insurance also needs to cover the non-monetary contributions of a breadwinning spouse, like medical insurance and retirement benefits. As people age, they need less term life insurance but there are exceptions. Any individual who has a partner or child that is likely to have extraordinary medical expenses in the future should buy as much term life insurance as he or she can reasonably afford.

The breadwinner in a partnership where one partner is a full-time homemaker is not the only person who should have term life insurance. In the event of the death of the homemaker, the surviving partner will have to pay funeral expenses and hire someone to take over the stay-at-home partner’s homemaking and childcare duties.

Approximately 40 percent of Americans have life insurance, and many covered by employer-sponsored plans lack adequate overage. Buying early, when a person is young and healthy, will result in individuals getting the best rates. People who are overweight, smokers or individuals who have risky occupations or hobbies will pay higher premiums for term life insurance.

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