Cost & Coverage
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Life insurance is financial protection for your family. While a policy pays out a benefit in most cases, there are a few instances when it won’t. Here are specifics about what life insurance does and doesn’t cover.
Life insurance is financial protection for your family. It allows you to provide for your loved ones in the event of your untimely death — and is especially important if you have people relying on your income or care. While a life insurance policy will pay out a benefit in most cases, there are a few instances when it won’t. Read on to learn the specifics about what life insurance does and doesn’t cover.
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In one sense, life insurance covers death. If you have life insurance and die while your policy is in effect, your beneficiary can file a claim for your death benefit. The death benefit is a lump sum of money that person (generally a trusted loved one) can use to pay for all expenses you were covering for your family — or would have covered in the future.
How far a life insurance payout goes depends on how much coverage you buy. However, people typically get enough life insurance to cover most or all of the following expenses:
Whether you’re a primary, secondary or sometimes breadwinner, that income allows your family to pay the bills, including the rent or mortgage, utilities and auto payments. You’re also covering basic household essentials like groceries, cleaning supplies and more. A life insurance payout covers those bills and allows your family to maintain their current standard of living, were you to die.
If you signed a mortgage, credit card, private student loan or other financing alongside a loved one, that debt won’t die with you. Your co-signer is still responsible for making good on any outstanding balances. Even if they aren’t an official co-signer, your loved ones are will want to cover certain loans related to their livelihood — like the mortgage or auto loan on the family car — in your absence. Life insurance allows them to do so, which is why many people factor debt into their coverage limits.
A life insurance policy would cover any child care expenses you’re currently shouldering, including daycare, after-school programs, in-home aides and more. These costs are important to consider whether or not you’re currently reliant on them. If a sole breadwinner dies, a spouse who is caring for the kids would likely have to return to work. And if the stay-at-home parent passes, the working spouse would need to pay for the crucial services their spouse previously provided. (We can help spouses compare and buy life insurance together here.)
On top of that, if you are a caretaker for aging parents or special needs adults, life insurance can cover the expense of their care.
Yes, life insurance can cover expenses your family isn’t shouldering now, but would face down the line, like college tuition. In fact, our agents generally recommend factoring in the cost of college if you have or plan to have children, given how high education costs have climbed.
The unexpected death of a loved one creates an immediate financial burden for families: the cost of a funeral and burial, which can run anywhere from $7,000 to $10,000. Many policyholders work end-of-life expenses into their coverage, so their beneficiary can use the life insurance payout for their funeral.
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Life insurance doesn’t cover application fraud discovered during a policy’s first few years, nor will it cover income replacement in the event of illness or injury. That coverage is provided separately by disability insurance, though there are a few riders you can add to life insurance policies that help with the cost of care after a critical or terminal illness diagnosis. Let’s examine these situations in further detail.
Life insurance policies come with what's known as a contestability period. That's a period of time (usually two years) after your policy goes into effect when the insurer can review your application for fraud. If you die within your contestability period and your insurer discovers you misrepresented something on your application, your beneficiary’s claim can get denied or reduced by the amount of money you should have been paying in premiums.
Contestability periods exist primarily to protect insurance companies from fraud. They generally only come into play when the policyholder’s death is suspicious, but there are two big things about contestability periods to note:
You can learn more about contestability periods here, but it’s important to disclose everything to your insurer during the application process.
Life insurance provides financial protection to a family when a policyholder dies. Disability insurance provides income protection to a policyholder if they can’t work due to illness or injury. There are a few life insurance riders that provide coverage for care if a policyholder is diagnosed with a critical or terminal illness. They include:
Again, these riders cover the cost of care, not your income. If you want coverage for illness or injury that inhibit your ability to work, you would need — and should get — a separate disability insurance policy.
Learn more about common life insurance riders.
Standard life insurance policies cover almost all cases of death due to illness, accident or natural causes. However, there are a few big exceptions life insurance shoppers and policyholders should know about.
Life insurance generally won’t cover deaths found to be related to the following causes:
Accidental Death & Dismemberment insurance is a very limited policy that only covers death or the loss of a limb due to certain accidents. It is usually available as a separate policy (sometimes available through an employer) or as a rider to a life insurance policy. In terms of purchasing a standalone policy, while AD&D insurance is cheaper, it’s also very limited and, at the end of the day, you’re best-served purchasing a term life insurance policy, which is also often relatively inexpensive.
In terms of adding an AD&D rider to your life insurance policy, it’s generally unnecessary, unless you have a dangerous job or hobby.
Outside of the financial safety net a policy provides, life insurance payouts are almost always tax-exempt. Your beneficiary will receive the death benefit and not owe any of it to Uncle Sam. So, you could say life insurance covers a tax-free inheritance for your loved one(s).
Note: The few instances where a life insurance payout might be subject to taxes generally apply to interest earned on a policy’s cash-value component or other investment gains. Beneficiaries of a large estate might have to pay taxes on a life insurance payout if it puts them over the estate tax threshold. As of 2018, the estate tax threshold is $10 million.
Learn more about life insurance and taxes.
Your beneficiary will have to file a claim, but once it’s processed, they should receive your life insurance payout within a few days. They will receive the payout as a lump sum or in monthly or annual installments in you set your policy up that way. The payout could get delayed if you die within the contestability period and your death was suspicious. Delays can lengthen the pre-payout period to as long as 30 to 60 days, assuming the claim is ultimately approved.
Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.
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Yes, we have to include some legalese down here. Read it larger on our legal page. Policygenius Inc. (“Policygenius”) is a licensed independent insurance broker. Policygenius does not underwrite any insurance policy described on this website. The information provided on this site has been developed by Policygenius for general informational and educational purposes. We do our best efforts to ensure that this information is up-to-date and accurate. Any insurance policy premium quotes or ranges displayed are non-binding. The final insurance policy premium for any policy is determined by the underwriting insurance company following application. Savings are estimated by comparing the highest and lowest price for a shopper in a given health class. For example: for a 30-year old non-smoker male in South Carolina with excellent health and a preferred plus health class, comparing quotes for a $500,000, 20-year term life policy, the price difference between the lowest and highest quotes is 60%. For that same shopper in New York, the price difference is 40%. Rates are subject to change and are valid as of 2/17/17.
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