Getting insurance is something you’re considering, but you’re not entirely clear on what it entails. That uncertainty is stuck in your head. You’re likely asking yourself, will this buy be a valuable asset or a foolish splurge? With so many options galore, it’s only natural to worry about choosing the right one. Between term, universal, and permanent policies, the choices can be overwhelming. So you’re considering life insurance? First, get a grip on what it covers and the different policy types that can benefit you.
What happens when the unexpected happens? That’s where life insurance comes in – it’s like having a backup plan for the people who depend on you.
Picture this: your family is going about their daily routine, but then the unthinkable happens. With life insurance, you can rest assured they’ll have the financial resources to keep going, even when you’re no longer there. Think of an insurance policy as a safety net. You fork over a premium, and the insurance company vows to provide a financial cushion for your beneficiaries when the time comes. This payout, known as a death benefit, can be used for various purposes.
Table Of Contents:
- What Life Insurance Can Cover
- What Life Insurance Does Not Cover
- Conclusion
- FAQs About What Does Life Insurance Cover
What Life Insurance Can Cover
This financial safety net can help your loved ones in numerous ways and provides them with options at a time when they may not feel up to making many decisions. Some typical uses for life insurance proceeds are:
- Covering everyday living expenses.
- Paying off outstanding debts like mortgages, credit cards, and personal loans.
- Funding future needs such as a child’s education or a spouse’s retirement.
But what does life insurance cover besides the obvious? As I said before, insurance coverage payouts can be used however your beneficiary wants; there are very few restrictions. So, you could purchase a life policy for your child’s future college expenses, and it will still provide financial support if they later decide on a different path.
To understand better, let’s break down some common expenses covered by life insurance:
Final Expenses
Planning for your eventual passing is something many find uncomfortable. But having life insurance in place can make it a little less stressful for your loved ones during a challenging time. Final expenses are typically paid first from the death benefit payout.
These final expenses include funeral costs, which have been rising in recent years. A simple funeral can easily cost $7,000-$10,000 (or more, depending on your wishes and those of your family). In addition, there may be medical bills or other outstanding debts. The death benefit can be used to settle those, allowing your family to grieve without the burden of figuring out how to pay.
Income Replacement
Imagine this scenario; the unthinkable happens, and you’re no longer there. It may now fall on your partner to support the family, manage the household, and continue working to stay afloat. Forty-four percent of Americans say that their families would feel financial hardship within six months of losing a wage earner, according to LIMRA’s 2022 Insurance Barometer Study.
The death benefit can replace lost income and help ease that burden. The money can help your surviving partner cover their living expenses. It allows them the breathing space to grieve, adjust to their new circumstances, and if needed, gain additional skills for entering the workforce or taking over the family business.
Mortgage and Other Debts
Having a mortgage is a big responsibility. Your family shouldn’t be forced to leave their home if you’re no longer around to make the payments. A life insurance payout could provide your loved ones with the funds they need to cover the remaining mortgage balance.
This way, they are not burdened with another monthly expense while they adjust to their new situation. This same principle can be applied to any outstanding debts, like car loans or credit cards. With those debts eliminated, it gives your family a clean financial slate and prevents them from struggling with debt while they grieve.
Education Expenses
Providing for a child’s education is one of the best gifts you can offer. College tuition fees are a huge burden on families. With a term life insurance payout, your children are less likely to take out substantial student loans and graduate with crippling debt. Below is a table with the average annual tuition and fees for the 2023–2024 school year, according to the College Board’s Trends in College Pricing and Student Aid report.
| Institution Type | Tuition and Fees (2023-2024) |
|---|---|
| Public Two-Year (in-district) | $3,860 |
| Public Four-Year (in-state) | $10,950 |
| Public Four-Year (out-of-state) | $28,240 |
| Private Nonprofit Four-Year | $39,400 |
Knowing your child has these funds can bring peace of mind now and ensure that their education is taken care of. It also offers more freedom when deciding on the best school for their needs.
Other Uses
As previously stated, one of the advantages of life insurance is that beneficiaries have very few limitations on how they can use the death benefits. It can be as unique as the person purchasing the policy and the loved ones they are leaving behind. Other possible reasons people choose to purchase life insurance are to:
- Replace someone’s salary indefinitely, like for a special needs child, aging parent, or a stay-at-home partner.
- Cover estate taxes.
- Charitable Giving – Leaving a legacy through a favorite cause or charity.
What Life Insurance Does Not Cover
You’re probably thinking; so, what does life insurance cover? It seems pretty simple; it pays out on just about everything. While life insurance offers great financial protection and peace of mind for your loved ones, there are a few scenarios it won’t cover. That is why it’s essential to understand these exceptions and clarify anything you may not understand with your insurance agent.
Exclusions Written into the Policy
Always carefully review the details of any life insurance policy you are thinking of purchasing because there will always be specific circumstances not covered. A prime example of this is if you pass away while engaging in illegal activity, such as drug trafficking. Those actions may void your policy.
Death During “Contestability Period”
When you apply for life insurance and get a policy, there’s something called a contestability period, usually the first two years. During this time, the insurer may look further into your death if they feel something wasn’t disclosed when you purchased it.
Say you accidentally didn’t tell them about a medical condition when you applied and then died because of that. Your beneficiaries might not get the payout if it’s found you withheld this critical information during the life insurance application process.
Suicide Clause
Many policies include this clause, which means that if the insured person dies from suicide during a specific timeframe (again usually within the first two years of the policy) then the death benefit may not be paid out to your beneficiaries. However, they will still receive any premiums paid up to that point. This exclusion helps mitigate the risk for insurance companies, but if you or someone you know is contemplating suicide, dial 988 to reach the 988 Suicide & Crisis Lifeline for immediate support.
Conclusion
Determining if life insurance is right for you, what it covers, and how it aligns with your financial goals and circumstances is valid. It’s essential to contact an experienced financial advisor who can help you assess those needs and guide you toward making well-informed decisions that provide peace of mind for you and your loved ones. Hopefully, with a better understanding of what life insurance covers you are one step closer to safeguarding their future.
FAQs About What Does Life Insurance Cover
What does life insurance normally cover?
A standard life insurance policy typically covers death from natural causes, accidents, and most illnesses. Your beneficiaries can use the money to help with everyday expenses, pay off debts, replace a source of income, fund their or your children’s future, and more.
What is not covered in life insurance?
Specific circumstances will vary depending on your insurance carrier, and what type of life insurance policy you’ve selected. For instance, if death occurs during a dangerous activity (such as skydiving) or as the result of a drug overdose, the claim may be denied.
What does life insurance payout for?
A life insurance policy pays out upon the death of the insured person. The policy’s death benefit will be paid out to your listed beneficiaries, which can be anyone you choose, upon receipt of a certified death certificate. They will then decide how to use the payout money.
What does life insurance not include?
There are numerous variations and stipulations regarding what does and doesn’t qualify under specific types of life insurance. Factors that affect your life insurance policy can include your age, health status, and the type of policy. That’s why consulting a financial expert is imperative, but be sure to thoroughly read all the details, terms, and conditions before purchasing a policy. For instance, permanent life insurance policies, like whole life insurance, accumulate a cash value you can borrow against or withdraw, but this may not be a feature on term policies.
