What does life insurance cover?
The thought of purchasing life insurance can be overwhelming, but many people find relief in knowing that their loved ones will be financially protected in the event of their death. In general, life insurance pays out to your designated beneficiary (or beneficiaries) upon your death. However, there are numerous policy types, making it difficult to determine which policy is best for you. The insurance editorial team at StrongInsurance has decades of experience assisting individuals in understanding their coverage options and making the best insurance decisions for their needs. We examined life insurance policies in depth to assist you in navigating what can appear to be a complicated market.
What does life insurance cover?
Life insurance is a type of policy that pays out a death benefit — a lump sum of money — to your chosen beneficiaries after you die. The primary purpose of life insurance is to provide financial support to your loved ones following your death. A life insurance policy payout can be used in a variety of ways, including:
- Pay for final expenses.
- Pay off your debts
- Make up for lost income
- Tuition for college
- Make a monetary donation
There may be additional options that you or your loved ones choose to use the payout for.
Monthly bills and expenses
One of the most common applications for life insurance is to replace your income for those who rely on it. This is why working with a licensed agent or financial advisor, or using a life insurance calculator, can be beneficial in determining how much coverage you require. That way, you'll know your loved ones will be taken care of if you die.
After receiving the death benefit, the beneficiary can use the money to pay bills, such as groceries, utilities, and childcare, as well as any other expenses that may arise. There are no restrictions on the types of expenses that can be paid with a death benefit payment.
Co-signed debts
Debt repayment costs can be difficult on anyone's budget, but paying down debts on which you co-signed after losing financial support from a loved one can be even more difficult. Mortgage payments, car loan payments, and other debts can all contribute to financial stress. Receiving a death benefit can relieve your loved ones of the burden of covering those expenses.
College tuition and education
If you are financially responsible for your child's college tuition or education, you should consider including those costs when purchasing a life insurance policy. That way, even if you die, your child will be able to pay for college. Including the cost of college in your life insurance calculations could significantly increase the amount of death benefit you require. The average annual cost of tuition and fees for various institutions for the 2021-22 school year was as follows:
- Public two-year in-district college: $3,800
- Public four-year in-state college: $10,740
- Public four-year out-of-state college: $27,560
- Private nonprofit four-year college: $38,070
Remember that these are annual figures and do not include other expenses such as room and board, meal plans and other food costs, books and supplies, or transportation. Rates can also differ significantly by state and institution. Because life insurance beneficiaries have the freedom to spend a payout however they see fit, factoring college costs into your death benefit amount could provide significant support after you're gone.
End-of-life expenses
Another important function of life insurance is to pay for your final expenses. These could include funeral expenses, the cost of a casket, and the cost of a reception. The death benefit of any life insurance policy can be used to cover funeral expenses. If that's all the coverage you require, you might want to look into final expense insurance. This type of permanent life insurance offers a small death benefit — typically no more than $25,000 — and does not require a medical exam to be approved. However, final expense coverage may be more expensive than other policy types for the amount of coverage you're likely to receive.
Child care or dependent care
Life insurance policies can help cover the cost of childcare, from daycare and after-school programs to nannies and other expenses. If your beneficiary is also caring for an aging parent or other dependent, a life insurance death benefit may help with those expenses as well if you die.
Medical expenses and long-term care
While the primary purpose of life insurance is to provide financial support for your loved ones, life insurance with living benefits allows you to use your life insurance coverage while you are still alive. Depending on your needs, you can select from a variety of living benefits. Many companies, for example, provide an accelerated death benefit rider, which allows you to access a portion of your death benefit prior to your death if you've been diagnosed with a terminal illness. This may assist you in paying for medical expenses while you are still alive, reducing the financial burden on your loved ones following your death.
While this is frequently advantageous, using a portion of your death benefit early reduces the total amount paid to your beneficiaries after your death. Furthermore, living benefits are not the same as long-term care insurance, which can help protect your finances from the effects of high medical bills.
Estate planning
Life insurance can cover the costs of estate planning after your death, in addition to funeral expenses. Estate planning differs from end-of-life expenses in that it entails hiring an attorney to close any remaining accounts in your name and officially reporting your death to the county and IRS. Many people are unaware that their descendants may still owe taxes to the IRS, and a life insurance policy can help them cover these costs so they are not burdened financially.
Leaving a legacy
It's simple to see life insurance as a necessary purchase. After all, it is assisting your loved ones in feeling financially secure following your death. Life insurance, on the other hand, can go a step further. You could use your life insurance policy to leave a monetary bequest to your beneficiary, your children, a group, or a charity. If you decide to go this route, make sure you get enough coverage. You'll almost certainly want your loved ones to receive enough money to cover daily expenses, debts, and the other costs mentioned here.
What doesn’t life insurance cover?
A beneficiary's use of a life insurance death benefit payout is unrestricted. In some cases, however, a death benefit may not be paid out, which means that the beneficiary will not receive the money upon your death.
- Policies that have expired or lapsed: If your life insurance policy is no longer active when you die, your beneficiary will not receive the death benefit. Term life insurance, for example, provides coverage for a set number of years. Your coverage is no longer active once the term expires (although most term policies include a guaranteed renewability feature). Permanent life insurance policies, such as whole life and universal life, do not usually expire, but they may lapse if your premium is not paid on time.
- Suicide: Many life insurance policies exclude suicide death from coverage for the first two to three years. If you die while the clause is still in effect, your beneficiaries will not be paid.
- Fraud: Life insurance policies have a contestability period. This is typically a two-year period following the start date of your policy. If you die during this period and your insurer discovers that you intentionally lied on your application, your beneficiaries may be denied the payout.
- Exclusions: While uncommon, some insurance companies include exclusions that specify specific situations in which your beneficiary may be ineligible for a payout, such as if the policyholder dies as a result of a hazardous activity. Exclusions are most commonly applied to deaths caused by dangerous occupations or hobbies; however, your policy may contain other exclusions. Check your policy to ensure you understand your specific coverage.