Life insurance companies pay a death benefit to your beneficiaries if you die while your policy is active. There are some rare situations when you won't be covered by life insurance, such as if you lied on your application or if you die by suicide within the first two years of your policy.
Your beneficiaries will receive the payout as a tax-free lump sum and can use the money for anything, whether it’s a mortgage, college savings, or funeral expenses.
What is covered by a life insurance policy?
What’s covered by life insurance falls into two categories:
The causes of death insured by your life insurance policy, and
The kind of expenses that can be paid with the policy’s death benefit.
It’s extremely rare that the insurer will need to intervene in either category, but it can happen.
What causes of death are covered by life insurance?
Life insurance policies cover almost all deaths, with a few exclusions. As long as your policy is active when you die, life insurance providers will pay out if your death is caused by:
An accident: Including accidental overdose from a prescribed medication
Suicide: As long as it occurs after the policy’s two-year suicide clause period ends
Homicide: Unless the beneficiary played a role in the murder
War or terrorism: In most cases — although some insurers do include exclusions for these causes of death
What expenses are covered by life insurance?
Your beneficiaries can spend your policy’s death benefit however they want.
Beneficiaries usually use the financial support for:
Everyday expenses: Including monthly bills, groceries, and other household essentials
Outstanding debts: Including a mortgage, credit card debt, private student loans, or auto loans
Childcare: Replacing care provided by a spouse
End-of-life expenses: Such as funeral expenses or end-of-life medical care
College costs: To fund continuing education for your spouse or tuition for your children
Some policies have add-ons called riders that allow you to withdraw part of the death benefit while you’re alive. You need to have a qualifying condition, such as a terminal illness or a disability, and – unlike the death benefit – the money can only go toward related medical costs.
Can you determine how the death benefit from your policy is spent?
When you buy a life insurance policy, you’ll be able to name your beneficiaries and how much money they’ll receive when you die. And while you can explain your wishes for the money, it will be up to your beneficiary to manage at their discretion after you’re gone.
If you wish for the funds to be used in a specific way, we recommend setting up a trust and a trustee to carry out your wishes. A trust can ensure that the money is used only for expenses that you ’ve approved.
What is not covered by life insurance?
Your beneficiaries won’t get the death benefit if your policy has expired or in situations involving fraud, certain criminal activities, or policy exclusions:
Expired policies: Policies only stay active while you pay your premiums and as long as your policy’s term. If your coverage expires before you die, or you lose your coverage because you missed your payments, your beneficiaries won’t get the death benefit.
Exclusions: If you have a high-risk hobby, like skydiving, you can get cheaper coverage by adding an exclusion into your policy, but then the policy won’t pay out if your death is skydiving-related.
Fraud: If you lie on your life insurance application, your provider can cancel your policy while you’re alive or deny or reduce the payout when you pass away.
Criminal activity: If you die while committing a felony, your provider may not pay out. And if a beneficiary commits a crime to try to get your insurance money, they won’t get a payout either.
How quickly does a life insurance policy pay out?
When you die, your beneficiary will need to file a claim with the insurer to confirm that you’ve passed away so they can receive the death benefit.
Life insurance companies usually take two weeks to two months to process and pay out a claim after it’s been filed.
If you die within the first two years of the policy (the contestability period) your insurer can review your application for fraud and any questionable circumstances surrounding your death. A review could delay payment for up to 60 days.
Delayed or denied claims are extremely rare. As long as you’re honest on your application, your policy will cover almost any cause of death, leaving your family with financial assistance for any of their present and future needs.