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Explaining Term Life And How Does Term Life Insurance Work

Answering the question: How much term life insurance do I need?

By Mike Heuer

When it comes to know how does term life insurance work, the anwer is simple. Term life insurance is a contract between the policyholder and the insurer underwriting coverage for a set number of years and then expires. Most term life plans last for 10, 20 or 30 years and provide a death benefit if the named insured dies while the policy is in effect. The named insured is the person whose life is insured by the plan and might be the policyholder, a spouse, family member or business partner.

Term life insurance was the first type of life insurance ever created, and many insurance and investment advisors consider it to be the purest form of life insurance because they do not grow cash value over time, unlike their whole life counterparts. Term life plans also are much more affordable, partly due to the fact that very few term life policies result in a death benefit being paid.

Knowing how does term life insurance work helps people better answer a question many face: How much term life insurance do I need? To find the answer to how much term life insurance do I need, it helps to look at family financial obligations.

In general, the amount of term life insurance needed depends on specific financial obligations, such as paying down a home mortgage, raising children and possibly putting them through college and leaving enough money for a spouse and family to maintain its standard of living if the main provider of income should die suddenly. That means medical costs, funeral costs and other unexpected expenditures need to be taken into account as well as fixed costs, such as a monthly cost of living.

Many experts on life insurance advise having a large death benefit the younger you are due to the fact surviving family members will need to live longer without their primary benefactor. A head of family in his or her 20s would be wise to purchase a term life plan whose death benefit is 20 times the annual gross income needed in order to provide a about 20 years worth of income as well as pay down debts, such as a home mortgage.

People between ages 30 and 40 would do well to buy a plan with about 16 times the gross annual revenue while those between ages 50 and 60 should get a policy whose death benefit would be about eight times the annual gross income. Once reaching retirement age, the suggested amount of term life protection is as low as five times the annual income.

The cost of term life insurance goes up the older people become, and that is one reason why it is best to carry higher coverage amounts when younger and scaling back to only what is needed to cover immediate costs plus some survivor benefits for any spouses.