When you get a life insurance policy, you enter into a contract with a life insurance company that guarantees a death benefit payout to your beneficiaries in most cases of death. There are a few different types of life insurance you can purchase, and each one has different features and options available. For example, term life insurance policies accumulate no cash value. They are basically a rented death benefit that will be paid out if you pass away during the term period. Whole life insurance, on the other hand, guarantees a death benefit for your whole life and accumulates cash value that you can use during your life as well.
What Does Life Insurance Cover?
There are two aspects to consider when asking what does life insurance cover: 1.) The causes of death that are covered by the policy and 2.) the expenses the policy’s death benefit can cover once paid out.
What Types of Death Are Covered By Life Insurance?
The main purpose of Life insurance coverage is to pay a death benefit. As long as your policy is inforce when you die, the death benefit will be paid out to your beneficiaries as provided in the contract. Here are some examples of different types of scenarios:
Death by Natural Causes: This can be old age, illnesses, heart attack, cancer, etc. This would normally be covered.
Death by Accident: This could include a car crash, accidental overdose, etc. This would normally be covered.
Death by Suicide: Death by suicide is covered unless the policy is within the contestability period (usually lasting for 2 years after the policy is purchased) in which case all premiums would be refunded rather than the death benefit amount paid.
Death by Homicide: This is normally covered unless one of the beneficiaries was involved in the homicide.
What Expenses Can The Death Benefit Cover?
Unlike some other financial support options, a life insurance death benefit is not limited to certain expenses, and in most cases is tax-free. Your life insurance beneficiaries are free to use the death benefit however they want and/or need. Death benefit payouts are often used to help cover things like:
Everyday Expenses: This could include things like rent, monthly mortgage payments, groceries, electricity bills, water bills, internet, and more.
Outstanding Debts: This is particularly important for any co-signed debts because the cosigner takes over full responsibility for the debts if the other passes away. This can include debts like mortgages, credit cards, car loans, student loans, and more.
Childcare: Child Care expenses may become a financial expense, especially in the case of a lost spouse.
End-of-Life Expenses: This can include funeral costs, medical expenses, and more. Funeral expenses can be expensive, and setting aside some financial support for this area can be key to lifting financial burdens during a hard time.
College Tuition: With the ever-rising cost of education, a death benefit can ease the burden of starting to or continuing to pay for your own or your children’s education expenses. This can include tuition, books, room and board, and more.
There are also instances where you can use part of the death benefit while you’re still alive to cover medical expenses or long-term care. This can often be done through an accelerated death benefit rider. With whole life insurance, you can borrow against your death benefit, or withdraw money from your policy and use it for anything you want. You can read more about how to access money from your whole life insurance here.
What Does Life Insurance Not Cover?
While life insurance is meant to provide a guaranteed death benefit, there are a few instances where the death benefit wouldn’t be paid out.
Expired Policies: If you do not pay the premium payment on your policy, or if you have a term policy that runs out of time and expires, you will not be covered during this period. As long as you pay your premium on whole life insurance policy, it will never expire. This is one of many reasons why whole life can be a better option over term insurance. For more information on the two options, read our term vs. whole life insurance page.
Exclusions: Life insurance companies have exclusions in their policies in which certain circumstances might result in the beneficiary not receiving the death benefit. Hazardous or dangerous activities such as skydiving, piloting a plane, etc. When you purchase your policy, you can choose to pay extra to be covered during these higher-risk activities, or choose to waive coverage.
Fraud: Your life insurance company can cancel, reduce, or deny your death benefit payout if you lie or misrepresent something on your life insurance application. It’s important to make sure you’re as accurate as possible when completing the application process so you don’t run into any issues later.
Criminal Activity: This one is fairly straightforward. If you were to die while doing something illegal, the life insurance company may not pay out the death benefit. This is also the case if a beneficiary is involved in something illegal when it comes to the policyholder’s death as mentioned earlier.
How Does Life Insurance Coverage Get Paid Out?
If you’re listed as someone’s life insurance beneficiary, you can generally expect to get paid the death benefit portion within a few days. Life insurance claims usually are a simple process and look something like this:
The insurance company will contact you if they have your information and explain what you’re going to receive. If they don’t have your information or you don’t get contacted by them, you can file a claim to receive the benefit.
You then can choose to either get the death benefit as a lump sum or receive payments over time with interest.
Death benefits are usually income tax-free unless you receive interest in addition to the death benefit or if you were not related to the insured.
Life Insurance Protection With McFie Insurance
McFie Insurancemakes it easy to get the life insurance coverage you need at a price that fits into your budget. Schedule a strategy session with us today to get all your questions answered and get a policy so you can have the peace of mind that your loved ones will be taken care of financially during and after your life.
