11 expenses that life insurance covers
Making a plan to provide for your loved ones after you’ve passed away is never easy, but it’s important in the long run. Life insurance creates a financial safety net for family, those you hold dear or even organizations that are important to you.
Have you wondered what life insurance covers? Life insurance funds provide financial support in a wide variety of situations, including death from an illness or injury. Some policies will even pay out during your lifetime to provide a cash cushion in certain scenarios, like paying for nursing home care. You can use life insurance policies to cover both long- and short-term expenses, based on your wishes and your family’s needs today and tomorrow.
Life insurance covers more than you may think. Here are just a few ways a policy can help support you and your family.
What does life insurance cover?
Life insurance can help you and your family plan for immediate expenses, like your funeral or day-to-day bills, along with long-term goals, like saving for a child’s college tuition.
One benefit of a life insurance policy is that it typically pays out much faster than a will or typical estate process, which can take months to go through probate and distribute cash or other assets you’ve left behind. Your family will typically receive a life insurance payout within weeks, not months, so they can take care of immediate needs. The payout is also tax-free and comes with no strings attached, so they can use it to pay for whatever they choose.
Let’s take a closer look at how life insurance can help you provide financially for those you love.
A life insurance plan can help your family maintain financial stability and their standard of living after you pass. Whether you contributed most of the income or not, the proceeds from a policy can cover critical daily expenses like mortgage or rent payments, monthly utility bills, and groceries. The average annual expenditures for families in 2020 was $61,334. The payout from a life insurance policy can help bridge that gap to make sure your family remains financially secure after your death.
Not everyone has access to paid time off or other grief-related resources through their employer. Life insurance policies can help provide a source of cash if your loved one needs to pay for therapy or take time off from work to grieve your loss.
Child or Dependent Care
Taking care of dependent family members, like your children or elderly parents, requires plenty of time and resources. If you stay home to care for members of your family, your partner may need to find thousands of dollars to hire paid help after your death. Life insurance can help ease the transition by providing funding to hire a nanny or caregiver, a cleaning service, or other professionals to take over the countless household tasks you manage.
Outstanding or Co-Signed Debts
When deciding how much life insurance coverage to buy, be sure to consider all debts, such as a mortgage; college tuition; and loans for credit cards, vehicles, and any businesses. If you die, your spouse or any co-signers may be responsible for paying back these debts, so make sure you allot enough for all of them.
The price of a funeral can come as a shock. According to the National Funeral Directors Association, the median cost is more than $9,000. Discuss your preferred end-of-life plan with your family early on, so you can figure out the associated costs and make a plan to cover them.
Final expense policies are a type of life insurance specifically intended to help you pay for a funeral or related expenses. Designed for people between 50 and 85 years old, they’re generally easy to apply for, don’t require a medical exam, and have lower premiums than other policies because they’re for smaller amounts.
Whether college or trade school is in your child’s future, saving for their education is likely one of your big financial goals. A life insurance policy can help your child pay for tuition, room and board, books, and other related costs if you pass away before you’ve met those long-term savings goals.
One of the largest expenses for any household is the mortgage. After the hardship of a loss, you won’t want your family to worry about keeping up with payments or finding a new place to live. Life insurance can help maintain any potential monthly payments or pay off the final years of a mortgage. If you buy a term life policy, you can often match your term length to the length of your mortgage to make sure you’re covered all the way through.
The average monthly cost of a nursing home is $8,821. Having life insurance in place is helpful for lessening the burden of your medical or living costs for your family through your final years. Permanent life insurance policies also build up cash value that you can borrow from while you’re living to pay for expenses like these.
If you are diagnosed with a terminal illness, you can use a life insurance policy add-on called a terminal illness rider to withdraw a portion of your death benefit early. Having early access to those funds can make a big difference for your family to help them pay for residential care, medical bills, or home health services. Keep in mind that you’ll need to buy this type of rider when you buy the policy, before you’re diagnosed with a major illness. It’s also important to know that any money taken out of your policy early will not be available to your beneficiaries in the final payout.
Did you know that your beneficiary doesn’t need to be a person? It’s possible to leave all or part of your life insurance payout to a charity that you care about. You can select multiple beneficiaries for your life insurance policy, including philanthropic organizations, religious organizations, or even your alma mater.
Leaving a Legacy
Leaving behind a financial legacy doesn’t always mean donating to causes and organizations that matter to you. You can also set aside money for your family and loved ones to not only take care of their immediate financial needs, but also set them up for future success. Some ways to do that include leaving money or setting up a trust fund that your beneficiaries can put toward a down payment on a house, set up a business, or continue their education.
A life insurance payout can also help sustain a business you’ve worked hard to build during your lifetime. The payout from life insurance for business owners can help your business partners cover any losses that come with your death so the business can stay afloat. Your business partners can also use the payout to buy out your share of the business from your family, giving your family a financial cushion in the wake of your death.
What causes of death are covered by life insurance?
Life insurance covers most causes of death, as long as your policy is active and you pay your premiums. Your insurance provider will generally pay out for deaths due to:
If you die from old age, disease, cancer, or a heart attack, your beneficiaries will typically receive a death benefit payout. If you have a pre-existing condition or chronic illness, it’s still possible to buy life insurance. Just be sure to disclose any medical conditions to your insurer when you apply, like asthma, arthritis, depression, or diabetes. Once you buy a policy, you’re also fully covered for any medical conditions you develop later while the policy is still active.
If you die in an accident, your beneficiaries will typically get a death benefit payout. This includes accidents at work, on the road, or at home. It’s also possible to add an accidental death benefit rider to your policy, which would increase the payout if your death was accidental.
Life insurance policies often have a clause that the policy will not pay out because of suicide during the first two years. Once that period has ended, though, your life insurance company may cover death by suicide. If you or someone you know is struggling with depression, suicidal thoughts, or may be at risk, please contact the National Suicide Prevention Lifeline at 800-273-8255.
What won’t life insurance cover?
Life insurance companies want your family to benefit from your policy, so there are just a few instances where your loved ones might not receive a payout. Here are some of the most common situations life insurance won’t cover.
Your insurer will only pay the death benefit on a term life or permanent life insurance policy if your premiums are up to date and the policy is active. Be sure to keep up with your payments and note when your term length is up to avoid any gaps in coverage.
Life insurance companies use exclusions, also known as clauses, in their policies to protect both the policyholder and the company. Make sure to carefully review any written exclusions in your life insurance policy where the insurer won’t pay out a death benefit, such as a suicide clause.
Life insurance policies typically come with a two-year contestability period. That means if you die within the first two years of your policy, the insurance company will investigate for any misrepresentations. If your insurer finds that you lied or misrepresented anything in your application, your beneficiaries might receive a smaller payout or no payout at all.
If a policyholder commits a crime and dies, insurance providers will typically not pay out the death benefits to the beneficiaries.
Frequently asked questions about life insurance coverage
How Much Does Life Insurance Cover?
Each person decides how much coverage to buy when they apply for a policy. A common rule of thumb is to purchase seven to 10 times your income, but the right amount is different for every person. The ideal amount of coverage depends on your assets, expenses, and financial goals. Try our term life insurance calculator to see a personalized estimate for a payout amount.
When Does Life Insurance Pay Out?
Once you pass away, your beneficiaries will need to file a claim with your insurance carrier to receive your life insurance payout. The days after a loved one’s death can be financially stressful, but it’s important for your family to file as soon as possible to avoid having the payout go unclaimed. When filing a claim, beneficiaries will need to collect required documents, like the death certificate, and specify how they’d like to receive the payout. If you need more guidance, here’s what to know about filing a life insurance claim.
How Quickly Does a Life Insurance Policy Pay Out?
Once your loved ones file a claim and your insurer processes the paperwork, your beneficiaries will typically have the payout within days. Insurance companies are motivated to pay out claims quickly, since they often have to pay interest on the death benefit if they don’t pay it out within a set period. Beneficiaries can then receive their payment in a tax-free lump sum or in monthly or annual installments, depending on the life insurance company’s payment options.
Do Permanent and Term Life Insurance Policies Cover the Same Things?
Technically, both permanent and term life insurance policies cover the same things, but with different guarantees and benefits. A term life insurance policy typically lasts for 10 to 30 years, with more affordable premiums that are generally more cost-effective for families.
Permanent life insurance policies (either whole life or universal life) will last for the policyholder’s lifetime and include a tax-deferred cash value component. These policies have higher premiums, but can make sense if you’re looking for a policy that’s guaranteed to pay out no matter when you pass away.
How Does Life Insurance Work if You Don’t Die?
If your life insurance policy expires while you’re living, your beneficiaries will not receive the death benefit payout. This is a common reason that people choose a permanent life insurance policy over a term life insurance policy. While permanent life policies are more expensive than term life policies, they provide a guaranteed payout to cover costs you know your family will need, like funeral expenses.
Does Life Insurance Cover Accidents?
Yes, life insurance covers accidents that happen at work, at home, and on the road.
Still have questions about what life insurance covers?
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At eFinancial, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed and updated regularly to ensure the information is as relevant as possible.