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What Does Life Insurance Cover?

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.

What does life insurance cover?

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:

The monthly bills & everyday 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.

Co-signed debts

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.

Child care or Dependent Care

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.

College tuition

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.

End of life expenses

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.

Not sure how much life insurance you might need? Our life insurance calculator will give you a tailored recommendation.

What does life insurance not cover?

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.

Application fraud discovered during a policy’s contestability period

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:

  1. Any misrepresentation can cause a claim denial. It doesn’t have to relate to your cause of death. If your life insurance company investigates your death in a car accident and discovers you didn’t disclose a past smoking habit, they could deny your beneficiary’s claim.
  2. Contestability can affect active policies, which is to say, if your insurance discovers you misrepresented something on your application within the first two years and you haven’t died, they can cancel your policy or up your premiums to account for whatever was discovered. These premium adjustments are often retroactive.

You can learn more about contestability periods here, but it’s important to disclose everything to your insurer during the application process.

Life insurance vs. disability insurance

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:

  • An accelerated death benefit rider covers end-of-life care when a life insurance policyholder is diagnosed with a terminal illness. The money is deducted from the total death benefit, as needed, and there are usually caps on how much money can go to these expenses. Standard life insurance policies come with an accelerated death benefit rider.
  • A critical illness rider covers treatment for certain illnesses that are likely to limit your life expectancy. The exact illnesses covered are specified in the rider, but can include heart attack, cancer, stroke, kidney failure, coma, ALS or AIDS.

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.

What types of death does life insurance cover?

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.

What types of death does life insurance not cover?

Life insurance generally won’t cover deaths found to be related to the following causes:

  • The death is a result of suicide: Most policies contain a clause stipulating a beneficiary’s claim will get rejected if the policyholder dies within two years of their coverage's start death and their death is ruled a suicide. (If you or someone you know is struggling with depression and/or thoughts of suicide, please call the National Suicide Prevention Lifeline at 1-800-273-8255.)
  • The policyholder was murdered by their beneficiary, On top of insurance company policies, most states have a "slayer statute" that prevent beneficiaries from receiving a life insurance payout if they intentionally caused or played a role in the policyholder's death.
  • The death was a result of criminal activity. Almost all policies contain a clause excluding death related to a policyholder's willing participation in a crime. So, for instance, if someone robs a bank and gets killed during the robbery, their life insurance coverage would not pay out to their beneficiary.
  • The cause of death was otherwise excluded. Though rare, some life insurers in certain states will write a policy that excludes death caused by a hazardous activity the policyholder is known to engage in. The most common of these activities involves flying (piloting a private plane, etc.). If the policyholder dies from the excluded activity, the beneficiary won't receive the death benefit. Exclusions like this are rare in the life insurance industry; they’re more common when you’re applying for disability insurance. Life insurers are more likely a prospective policyholder a higher premium to have that activity covered — or outright deny them a policy.

Life insurance vs. Accidental Death & Dismemberment insurance

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.

What are the benefits of a life insurance policy?

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.

When does a life insurance policy pay out?

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.

Disclaimer: 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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