What Does Life Insurance Cover?
Life insurance provides a death benefit to a beneficiary after the policyholder’s death. Beneficiaries can use this money for things like income replacement, paying off debts, and covering funeral costs.
The types of death that life insurance covers include natural causes, such as old age and illness. However, some policies include what’s called a suicide exclusion period that voids coverage.
Monthly bills and expenses
Many people make the mistake of overlooking monthly bills and expenses when creating a budget. The most obvious of these are mortgage payments, car loans, and insurance premiums. But other things can also add up. For example, the amount you spend on transportation can vary from month to month depending on whether you drive yourself, ride with friends, or use public transit. And, for some, pet care can be a big expense. This includes food, vet bills, and supplies, and may also require a special fund to cover the cost of recurring appointments.
Adding these expenses up can give you a better idea of your total monthly spending and how much you should allocate to other items. You can then subtract this number from your monthly income to get an idea of how much you’ll have left over for fun stuff, paying down debt, or contributing to savings. And don’t forget to include a category for unexpected expenses, such as entertainment costs or shopping purchases. These can quickly add up!
Co-signed debts
If you ever agree to co-sign a debt with a friend or loved one, life insurance can protect your financial well-being should the primary borrower fail to pay their obligations. Insolvency proceedings have been triggered by debts that a person has co-signed, so it’s important to weigh the risks and rewards carefully. A regular credit check through Experian can help you keep an eye on your shared credit history.
Depending on the type of policy you select, life insurance can also provide a cash value that you can borrow against or use to cover expenses like college tuition or a down payment on a new home before you die. These types of policies, known as whole and universal life insurance, typically have higher premiums than term life policies.
College tuition and education
Life insurance policies can help cover the cost of college tuition and education. This typically includes student tuition, necessary fixed fees (like registration fees and athletic fees), and a portion of room and board costs for students who live on campus. Life insurance benefits can also be used to pay for graduate school or continuing education.
Mandy Sleight is a licensed property, casualty, and life insurance agent who has been working in the industry since 2005. She uses her knowledge of personal finance and the insurance industry to write engaging content that helps readers make smarter decisions with their budgets and finances.
End-of-life expenses
End-of-life expenses can add up fast, especially in the final stages of life. The average funeral with a viewing and burial costs $7,640 (National Funeral Directors Association). Palliative care costs can run from $5,000 to $10,000 per month depending on the severity of the illness.
Hospital care can also be extremely expensive, with Medicare hospital charges in the last month of life costing an average of $32,379 (Arcadia Healthcare Solutions). Life insurance policies can help to cover these and other end-of-life expenses.
Many life insurance policies also include accidental death benefits, which will provide a payout to beneficiaries in the event of an overdose, poisoning, drowning, motor vehicle accident, or other tragic accidents. This is a separate rider from the policy’s main death benefit. Beneficiaries can use this money for whatever they see fit, whether that be paying off credit card debt or creating a legacy nest egg.
Child care or dependent care
If you have children or other dependents who need care, life insurance may help cover the costs. You can also use money in a Dependent Care Flexible Spending Account (FSA) to pay for qualifying expenses. The Child and Dependent Care Tax Credit can also reduce your federal income taxes by up to 35% of eligible expenses. Eligible expenses include daycare, after-school programs, nannies, and work-related child care. Generally, you must be a custodial parent to qualify for this credit.
Medical expenses and long-term care
Many people purchase life insurance to help pay for medical and long-term care expenses after they die. A traditional life insurance policy will pay out a lump sum to your beneficiaries, which can be used to cover any outstanding debts and provide financial support for loved ones after you’re gone.
However, there are some instances when the death benefits of a life insurance policy may not be paid out. These situations are referred to as exclusions. For example, suicide is not covered by most life insurance policies, unless you have a rider on your policy that specifically includes it. Additionally, if you engage in risky professions or activities (such as piloting, logging, construction, racing cars, rock climbing, etc.), your premiums may be higher than those of a person who doesn’t participate in those activities.
For this reason, it’s important to be completely honest about your hobbies and job when you apply for life insurance. Otherwise, your policy could lapse if you miss payments. For example, if you forget to pay your life insurance premium, you might face a two-year countdown before the insurance company will deny your claim.
Estate planning
A comprehensive estate plan is an essential step in ensuring your family is taken care of after you’re gone. It can help with issues like settling debts, estate taxes, and creating a legacy fund. It also includes creating a revocable living trust and creating a will or last testament. An estate plan should also include an inventory of your property, including your home, cars, and other assets, as well as listing any outstanding debts like mortgages or lines of credit.
Life insurance can be used to cover a variety of expenses, depending on the policy type. However, some of the most common uses are:
The main purpose of life insurance is to provide financial security for loved ones after you’re gone. Typically, you pay a premium – monthly or annually – in exchange for a death benefit. The amount paid out upon your death depends on the type of policy you have, how long you’ve been covered, and your health. For example, people who engage in risky activities like logging, aviation, or offshore oil rig work may have to pay higher premiums than other applicants.
Leaving a legacy
Leaving a legacy isn’t just about how much money you can leave behind. It’s about the lasting impact you can have on your loved ones, your community, and the world around you. It’s a natural human impulse to want to leave a mark after you die.
Your legacy can be something as small as a great family story or as big as the profits of your business or a charity you’ve started. But no matter how big or small, a legacy requires planning and intentionality.
Life insurance can be an important component in building a legacy. It’s a way to reassure loved ones that you’ll leave behind more than just debt and expenses after your death. It’s also a way to pass down your values and beliefs to future generations. A good plan can ensure your legacy is a positive one.