Between funeral costs and day-to-day expenses, your family could face serious financial pressure after you pass away. To better prepare your loved ones for this possibility, you may consider purchasing a life insurance policy.

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Generally speaking, life insurance provides a payout to your chosen beneficiary (or beneficiaries) upon your death. However, there are many different types of life insurance, so it can be hard to figure out what policy is best for you. Bankrate took a detailed look at what a life insurance policy covers to help you navigate what can feel like a complicated market.

What does life insurance cover?

Life insurance is a type of policy designed to provide a death benefit — a sum of money — to your selected beneficiaries after your death. The primary function of life insurance is to provide financial support to your loved ones after your passing. The payout from a life insurance policy can be used in a number of ways: to pay for end-of-life expenses, to pay off debts, to replace lost income, to help send children to college, to leave a financial gift and more.

Monthly bills and expenses

One of the main uses for life insurance is to replace your income for those who depend on it. This is why it can be helpful to work with an agent or use a life insurance calculator to determine how much coverage you need. That way, you know your loved ones are going to be taken care of when you pass away.

Upon receiving the death benefit, the beneficiary can use the money to pay for bills — including grocery, utility and childcare expenses — as well as other costs that may pop up. There aren’t restrictions on what kinds of expenses you can use a death benefit payment for.

Co-signed debts

Debt repayment costs can be tough on anyone’s budget, but paying down debts on which you co-signed after losing a loved one’s financial support can be even tougher. Mortgage payments, car loan costs and other debts can cause financial stress. Receiving a death benefit can help your loved ones pay those costs without worry.

College tuition and education

If you’re financially responsible for your child’s college tuition or education, you may want to factor those costs in when you purchase a life insurance policy. That way, should you pass away, you can still help your child pay for college. Adding the cost for college into your life insurance calculations could dramatically increase the death benefit amount that you need. On average, the annual cost of tuition and fees, for various institutions, is 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

Keep in mind that these figures are annual and don’t include other expenses, like room and board, meal plans and other food costs, books and supplies, or transportation. Because life insurance beneficiaries can spend a payout however they see fit, incorporating college prices into your death benefit amount could provide significant support after you’re gone.

End-of-life expenses

Another primary function of life insurance is to pay for your end-of-life expenses. These could include your funeral costs, the price of a casket and the expense of a reception. Any life insurance policy’s death benefit can be used to pay for funeral costs. If that’s the only coverage you need, though, you may want to consider final expense insurance. This type of permanent life insurance provides a small death benefit — usually no more than $25,000 — and generally doesn’t require a medical exam for approval. However, compared to other policy types, final expense coverage may be more expensive for the amount of coverage you’re likely to get.

Child care or dependent care

From daycare and after-school programs to nannies and other expenses, life insurance policies can help cover the cost of childcare. If your beneficiary is also taking care of an aging parent or other dependent, a life insurance death benefit could help with those costs, too, if you pass away.

Medical expenses and long-term care

While life insurance is primarily used to provide financial support for your loved ones, you can sometimes use your policy to your benefit. Life insurance with living benefits provides options for you to use your life insurance coverage while you are still alive. There are different types of living benefits you can choose from, based on your needs. For example, many companies offer an accelerated death benefit rider, which provides you with access to a portion of your death benefit prior to your passing if you’ve been diagnosed with a terminal illness. This may help 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, know that using a portion of your death benefit early will effectively reduce the total amount paid to your beneficiaries after your death. Additionally, living benefits aren’t the same as long-term care insurance, which can help shield your finances from the effects of extended medical costs.

Estate planning

In addition to funeral costs, life insurance can cover the cost of estate planning following your 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 your name and officially report your death to the county and IRS. Many people fail to realize that descendants may 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

It’s easy to see life insurance as a practical purchase. After all, it’s helping your loved ones feel financially secure after your passing. But life insurance can go a step further. You could use your life insurance policy to leave a financial gift to your beneficiary, your children, an organization or a charity. If you choose to do this, just be sure you buy an appropriate amount of coverage. You’ll likely still want your loved ones to have enough of a payout to cover daily expenses, debts and the other costs mentioned here.

What doesn’t life insurance cover?

There aren’t any limitations on how a beneficiary can use a life insurance death benefit payout. However, in some cases, a death benefit may not be paid out, which means that the beneficiary wouldn’t get the money upon your death.

  • Expired or lapsed policies: If your life insurance policy is no longer active when you pass away, your beneficiary will not receive the death benefit. Term life insurance, for example, covers you for a specific number of years. Once the term ends, your coverage is no longer active. Permanent life insurance policies, like whole life and universal life, don’t typically expire but may still lapse if your premium isn’t paid.
  • Suicide: Many life insurance policies contain a provision that death by suicide is not covered for the first two years. If you end your life while the clause is still in place, your beneficiaries will not receive a payout.
  • Fraud: Life insurance policies come with a contestability period. This is usually a two-year period following the date your policy starts. If you pass away during this time and your insurer discovers that you intentionally misrepresented something on your application, your beneficiaries may be denied the payout.
  • Exclusions: While rare, some insurance carriers include exclusions that identify specific circumstances in which your 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 by risky professions or hobbies; however, there may be other exclusions stipulated in your policy. Be sure to review your policy to understand your specific coverage.

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