What does life insurance cover?

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More than half of adults in the U.S. have some form of life insurance, according to a 2021 Life Insurance Marketing and Research Association (LIMRA) study. Why is having a life insurance policy desirable? Life insurance allows you to financially take care of your loved ones after your death. A life insurance policy can also help you plan your estate and leave something behind for your descendants.

What does life insurance cover?

Life insurance provides a death benefit to your selected beneficiaries after your death. A death benefit can help reduce the financial burden associated with settling your affairs, including funeral costs, debt settlements and your estate. It could also pay for financial obligations such as a mortgage or college tuition. According to insurance expert Laura Adams, “The purpose of life insurance is to make sure that people who depend on you, such as a spouse, partner, children, and aging parents, wouldn’t be hurt financially after your death.”

Monthly bills and expenses

Whether or not you’re the main source of income for your family, it’s likely that you help cover the cost of rent, mortgage, groceries, utilities, child care and other household necessities. For this reason, many insurance experts recommend that people take out a life insurance policy that’s equal to 10-15 times their current income. This will help your loved ones maintain their current lifestyle after you’re gone, reducing their financial burden following your death.

Co-signed debts

“If you have any co-signed loans, such as home, auto or student loans, the other party would be fully responsible for your debt after you die,” says Adams. “So, it’s critical to have enough life insurance to cover your portion.”

Even debts that aren’t officially co-signed by a family member or loved one may become their financial responsibility after your death. Life insurance policies help cover the cost of these debts so that your loved ones can settle any remaining balances in your absence without experiencing financial turmoil.

College tuition and education

If you’re financially responsible for your child’s college tuition or education, it helps to factor in the cumulative cost when determining how much coverage you need. CollegeBoard reports that the average annual cost of college tuition is as follows:

  • Public two-year in-district college: $3,440
  • Private four-year college: $32,410
  • Public four-year out-of-state college: $23,890
  • Public four-year in-state college: $9,410

Life insurance beneficiaries are able to spend the payout however they see fit, meaning the proceeds could help them pay for their ongoing education in the event of your death.

End-of-life expenses

Life insurance policies can also be used for covering the cost of end-of-life expenses. It may come as a surprise to learn that the average funeral costs $7,640 and can cost even more depending on the other services provided.

You may want to review the costs of your desired burial wishes and discuss your end-of-life plan with your family so they can make the appropriate arrangements. Making these decisions in advance will help you select the amount of coverage necessary to aid in their financial obligation for your funeral expenses.

Child care or dependent care

From daycare and after-school programs to nannies and other expenses, life insurance policies can help cover childcare expenses for which you currently pay for or do yourself. By taking out a life insurance policy, you could effectively cover these costs and allow your loved ones to continue living the same quality of life they have come to enjoy.

Medical expenses and long-term care

Many life insurance policies provide an accelerated death benefit rider, which provides the policyholder with access to a portion of their death benefit prior to their passing if they’ve been diagnosed with a terminal illness. This helps you pay for medical expenses while you’re still alive, reducing the financial burden on your loved ones after your passing.

While this can often be a great benefit, policyholders should know that removing a portion of their death benefit will effectively reduce the total amount paid out to their beneficiaries after their death. For example, if you have a $500,000 life insurance policy and use $100,000 to pay for medical expenses while still alive, the beneficiary will be paid out $400,000 rather than the full amount indicated in the policy details.

Estate planning

In addition to funeral costs, life insurance can cover the cost of estate planning following one’s death. Estate planning is a little different from end-of-life expenses in that it involves securing an attorney to close out any remaining accounts in the decedent’s name and officially report the death to the county and IRS.

“A life policy can be used as an estate planning tool to make sure your heirs could cover legal fees and taxes,” says Adams. Many people fail to realize that descendants will still owe taxes to the IRS, and a life insurance policy can help them cover these costs so they are not incurring unnecessary financial burden.

Leaving a legacy

“If you want to leave a financial legacy with particular organizations or charities, you can include them as a life insurance beneficiary,” says Adams. This is a great way for policyholders to not only ensure their loved ones are taken care of, but to also make sure they can still contribute to the causes they care about following their death.

Leaving a legacy doesn’t have to mean listing a charitable organization as a beneficiary. You can also set aside enough money for your loved ones to not only take care of immediate financial needs following your death, but to also help them plan for their long-term financial goals. Again, beneficiaries can use the proceeds in multiple ways, so leaving behind a large sum or planning a trust fund with their life insurance payout could help them put a down payment on a home, start a business or further their education.

What does life insurance not cover?

While life insurance covers many helpful things for policyholders and their beneficiaries, it’s equally important to understand the things that life insurance does not cover. The following outlines some of the most notable items that are not covered by life insurance:

  • Expired policies: Term life insurance is provided at a set number of years. Once the term ends, the policyholder’s coverage is no longer active. For example, if you purchase a 20-year term life insurance policy, but do not die before that term ends, your beneficiaries will not receive a payout. For those seeking life insurance that does not expire, it’s a good idea to choose whole life insurance. Many companies offer an option to convert term life to a whole life policy at the policy’s expiration.
  • Fraud: Life insurance policies come with a contestability period, which is usually a two-year period following the date from which your policy goes into effect. If you pass away during this time and your insurer discovers that you misrepresented something on your application, your beneficiaries may be denied their payout claim. Most of the time, contestability periods only come into effect if the policyholder has died under suspicious circumstances; however, any misrepresentation can cause a claim denial, so it’s important to ensure all information entered in your application is accurate.
  • Criminal activity: If a policyholder willingly commits a crime and dies during the criminal activity, the beneficiaries will not be eligible for an approved claim.
  • Exclusions: While rare, some insurance carriers provide exclusions that identify specific circumstances in which a policyholder’s beneficiary may not be eligible to receive a payout, such as if the policyholder dies as a result of a hazardous activity. Exclusions most commonly apply to deaths caused due to piloting an aircraft; however, there may be other exclusions stipulated in your policy depending on where you live in the U.S. Be sure to carefully review your policy to understand if you may be considered an at-risk policyholder.

Frequently Asked Questions

How much does life insurance cover?

Policyholders decide on their death benefit coverage at the time they apply for their policy. It’s generally recommended for individuals to take out a policy in the amount of 10-15 times their current income as this helps ensure expenses are accounted for after their passing.

When does a life insurance policy pay out?

After the policyholder’s death, the beneficiary will need to file a claim with the insurance carrier in order to receive their payout. This can be a lengthy process, and can take a few weeks for the payout to finally arrive. Depending on how the policyholder set up their payout stipulations, beneficiaries may either receive the payout in one lump sum or in monthly or annual installments.

Do you need life insurance if you have no dependents?

As a single person, whether or not you should get life insurance depends on your financial goals. If you take care of any loved ones, such as a parent or sibling, you may want to purchase a life insurance policy to take care of their financial needs after your death. If you have co-signers on a lease or financed vehicle, your co-signer could be left with the debt after you pass away. You may consider taking out a life insurance policy to protect their finances.

Do children need life insurance?

If you’re wondering whether to get your child life insurance, consider the pros and cons. Child life insurance may seem like an unnecessary expense because children do not typically have a high mortality rate or financial obligations that must be sustained after their death. However, life insurance could make your child more insurable in the future and can even act as an investment vehicle.

Written by
Carly Severino
Insurance Contributor
Carly Severino has two years of experience in writing for insurance domains such as Bankrate.com, Coverage.com, Reviews.com and TheSimpleDollar.com. She has experience covering a broad range of insurance products, including homeowners, life, auto, and medical insurance. Her expertise has also been called upon in the development of various websites for insurance companies, including Birtwhistle & Livingston, Inc., GovTech Insurance and Tax Title Services.
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