When you purchase life insurance, you’re making a commitment to your family’s future. And like any purchase, you really ought to know what you’re buying.
For example, if you were buying a house, you’d be smart to ask a few questions. How many bedrooms are there? What are the utility costs? Does it even have a roof? It’s important to understand what you’re getting with life insurance too.With life insurance protection, an insured person’s family or whoever their chosen beneficiary is will receive a payment in most cases of death. But while life insurance covers most situations, there are some where coverage may not be provided. Because of this, it is important to read your policy carefully.
And hey, we understand this can be a difficult topic to discuss — no one likes to talk about death and mortality. But taking a few minutes to understand your coverage will add peace of mind for you and your family.
What causes of death are covered by life insurance?
Life insurance covers policyholders (and their beneficiaries) through most cases of death. Some of the most common include:
Natural causes
People who are insured under a life policy are covered should they die of natural causes, including illnesses like COVID-19 and cancer.
Accidental death
An insured person who passes away due to an accident, including car accidents, drownings, an accidental drug overdose or similar events, is covered by life insurance. However, there are some exclusions to this depending on specific policy guidelines.
Suicide
Death as the result of a self-inflicted injury is normally covered after the policy has been active for two or more years. This can change depending on the individual policy.
Homicide
Unless a beneficiary was involved in the insured person’s death, they can receive the proceeds of their loved one’s life insurance policy.
What does life insurance not cover?
When someone passes away, there is an assumption that their life insurance policy will always pay out its proceeds to beneficiaries. However, there are some cases when life insurance will not pay. Some examples include:
Fraud
If it turned out the insured intentionally lied on their application, their beneficiaries would normally not receive the payout of the policy. Additionally, if the death itself resulted from an act of fraud, that death would not be covered by life insurance.
Illegal activities
Deaths resulting from illegal activities are not covered by most life insurance policies. These include drug overdoses, drunk driving accidents and more.
Lapse of coverage
If, for whatever reason, someone stops paying premiums or their coverage lapses, their death will not be covered by life insurance. This is a great reason to stay up-to-date on payments!
Specific exclusions
Most life insurance providers will have specific risky activities that they do not cover. These can include extreme sports, skydiving, personal aviation and more. It’s important to read your policy carefully to know which activities are excluded.
Which expenses can life insurance cover?
The death of a loved one often can mean unexpected expenses without the income to pay for them. Thankfully, life insurance policies can help ease the burden during such a stressful time.
Daily living expenses
When an insured passes away and their employment income ceases, it can cause a severe financial hardship on a family. Life insurance proceeds help cover continuing expenses, such as mortgage or rent payments, groceries, utilities and other costs of daily living.
Debts
Some family members find themselves in a significant amount of debt after the loss of a loved one. Life insurance is a great way to pay off a mortgage, business loan, credit cards or student loans.
Care costs
The loss of an income can make it very difficult to manage the expenses associated with childcare, elder care or long-term care. Life insurance proceeds can help in covering these ongoing costs so that a surviving spouse can continue to work.
Final expenses
One of the most common ways that life insurance funds are utilized is for a loved one’s final expenses. The costs associated with funerals or other final arrangements can add up quickly, so many families have used life insurance proceeds to pay for these types of expenses.
Inheritance
Many families desire to leave a legacy that supports their loved ones well into the future. Generally, life insurance proceeds are not considered taxable income, making them an attractive option for those seeking to leave their family an inheritance.