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If you’re thinking about buying life insurance, it’s important to understand how the policy works — including what it pays for and what it doesn’t. Here’s what life insurance covers and how your loved ones can use the payout after you die.
What does life insurance cover?
Life insurance covers the life of an insured person. If that person dies while the policy is in force, the life insurance company will pay a sum of money — called the death benefit — to that person’s beneficiaries. Life insurance beneficiaries can be people, such as your spouse, or entities, like a trust or charitable organization.
Say you die with a $300,000 life insurance policy, and your husband is your only beneficiary. Assuming you hadn’t accessed any of the death benefit in advance, the insurer would pay the $300,000 to your husband. He could put the money toward a variety of expenses, including mortgage payments, college tuition for your kids or the bills from your funeral.
Some life insurance policies cover two people’s lives. Joint life insurance may pay out after the first or second person dies, depending on the type of policy you choose.
What expenses can life insurance cover?
Life insurance is primarily designed to replace your income and ease the financial burden on your loved ones when you die. Beneficiaries can spend a life insurance payout on anything they’d like. But when you’re trying to figure out how much life insurance you need, the following are some common expenses you may want them to be able to cover after you’re gone.
Your mortgage and other debts
Life insurance can pay off your mortgage so your family doesn’t have to worry about how to make future house payments without your income. Many homeowners buy coverage equal to their remaining mortgage balance for this reason.
You may also want enough life insurance to pay off other outstanding debts such as private student loans, especially if there’s a co-signer who will be left responsible for the balance.
Even if you don’t have a co-signer, a policy can help your loved ones pay loans that are linked to their livelihood, such as a car loan. Plus, it protects their credit scores from any damage caused by late or delinquent payments.
Child, household and dependent care
If a family’s primary wage earner dies and a stay-at-home parent has to go back to work, life insurance can help cover expenses like day care and summer camps.
Stay-at-home parents often perform a lot of unpaid labor, such as cooking, cleaning and driving the kids around. If they die, the working parent would need to take over those household duties or hire people to help. The payout from a life insurance policy can step in to help keep the household running smoothly.
The same goes for other dependents. Say you’re the primary caregiver for your aging mom. If you die before she does, a life insurance payout could go toward in-home nurses to take your place.
Did you know…
Life insurance can also take care of expenses associated with raising a special needs child, such as specialized equipment. A life insurance policy can bridge the gap where your health insurance falls short.
College tuition and other educational expenses
The cost of tuition at a private college or high school can run tens of thousands per year. Having enough life insurance to pay for your children’s education will leave your grieving family one less burden to deal with and help your kids graduate without student debt.
Final expenses
Funeral and end-of-life expenses can add up quickly — the median cost of a funeral and burial is $8,300, according to the latest data from the National Funeral Directors Association.[0]
And if you die after a long illness, there may be lingering medical bills to pay, too.
Everyday living expenses
Aside from the bigger-ticket items above, life insurance can also cover other common costs such as utilities and groceries after you’re gone, allowing your family to maintain their way of life.
What causes of death does life insurance cover?
Depending on the type of policy you have, life insurance will generally cover:
Natural deaths. Dying from a heart attack, disease or old age would be considered a natural death.
Accidental deaths. Accidents may include car crashes, drowning or falling. Some policies offer accidental death benefit riders, which increase the payout if you die in an accident.
Homicide. Life insurance often covers homicides, but the circumstances of the death can affect the payout. For example, if a beneficiary murders the insured person, the killer won’t receive the death benefit.
What does life insurance not cover?
There are certain scenarios in which your life insurance policy won’t cover your death. Depending on the policy, these may include:
Criminal activities. In general, if you die while committing a crime, your beneficiaries won’t receive the death benefit. This can apply to drug and alcohol abuse. For example, if you die while driving drunk — an illegal activity — the policy typically won’t cover the death.
High-risk hobbies. Some policies won’t pay out if you die while participating in a hazardous hobby, like skydiving.
Misrepresentation. If you lie on your life insurance application, the insurer may cancel your policy or refuse to pay out after your death. Make sure you’re as honest and open as possible when applying for coverage.
War or terrorism. Some life insurance policies may exclude death as a result of war or terrorism.
Travel to specific countries. Many insurers exclude deaths while visiting countries on the State Department’s travel advisory list. These may include countries facing terrorist threats, civil wars or disease outbreaks, and can change at any time. Be sure to read the fine print of your policy.
Note that you must keep up with your premiums to keep your policy in force. If your life insurance lapses and you die before you’re able to reinstate it, your beneficiaries may not get a payout.
What do life insurance riders cover?
Life insurance riders are add-ons that can expand your coverage. Some may be available at no charge, while others cost extra to add. Some of the most common riders offer coverage for:
Illness or injuries. Some riders let you access some or all of your death benefit while you’re still alive. For example, a critical or chronic illness rider may let you withdraw money to put toward cancer treatments or in-home care. An accelerated death benefit rider allows you to tap in to your death benefit if you’re diagnosed with a terminal illness, while a long-term care rider can help pay for an assisted living facility or in-home care if you can no longer take care of yourself on your own.
Payments if you can’t work. If you’re totally disabled, your life insurance policy can provide monthly income payments and/or waive your premiums, depending on the riders you choose.
Your spouse or children’s lives. Instead of getting them separate policies, you may be able to use a rider to add life insurance coverage to your policy for your spouse and/or kids.
How long does life insurance coverage last?
Term life insurance, the most popular and affordable type of policy, typically lasts 10 to 30 years. If you outlive the term of the policy, there’s no payout. Some term policies can be converted to permanent ones if you decide you need insurance beyond the end of the coverage period. Learn more about convertible term life insurance.
Permanent life insurance is designed to last your entire life (though certain policies may end at an advanced age such as 100 or 120). Permanent policies earn cash value that you can tap during your lifetime but generally cost a lot more than term policies.
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