What Does Life Insurance Cover?

Last updated 03/18/2024 by

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Summary:

Life insurance covers both accidental and natural death. The beneficiaries can then use the death benefit to pay bills, debts, or even college tuition. However, many policies will not pay a death benefit if the policyholder died while committing a felony or insurance fraud.

Death is never pleasant to think about, but sometimes it is a necessity. As you grow older, you may have to ask yourself, “What will happen to my family once I’m gone?” Losing a loved one is never easy, and the expenses of death can quickly add up. To ensure your family is financially protected after you pass, you may want to consider a life insurance policy. But what does life insurance cover?

Especially if you’re the breadwinner of your family, life insurance benefits can be a huge help to your family once you’re gone. In this article, we’ll discuss what life insurance covers, how your family can use your death benefit, and what a policy may refuse to cover.

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How does life insurance work?

Life insurance is a form of insurance designed to replace your income after you pass. When you first apply for life insurance, the insurance company will review your overall situation, including your hobbies, habits, and occupation as well as your health history. Depending on this research, the insurance company will then decide how much your premiums will cost.

Once the policy is in place, you make monthly premium payments to your life insurance company, which would then pay your loved ones through the policy’s death benefit after your passing. There is no fixed rule on how much coverage you should buy. It all depends on your financial responsibilities and how much you can afford. One popular rule of thumb is that a life insurance policy should cover about 10 to 12 times your annual salary.

How much life insurance costs will depend on the specifics of your policy’s coverage. If your life insurance coverage is more expansive or your health history is more complicated, your policy may require higher premiums. On the other hand, if you’re a healthy individual in your mid-30s, your policy will likely be more affordable.

Term life insurance vs. permanent life insurance

You might be surprised to learn that there are a few different types of life insurance policies. The best life insurance policy for you will depend on your family and personal situation, your goals, and your income, so be sure to pick the right policy for you.

Term life insurance policies. These policies only last for a certain period. Because of this limited protection, a term life insurance policy can have cheaper premiums that may be worth it in the end.
Permanent life insurance policies. Unlike term life insurance, a permanent life insurance policy covers you for your entire life. With this in mind, it’s easy to see why the life insurance premiums for these policies are a little higher. Permanent policies include both universal life insurance and whole life insurance policies.

It can be confusing to sift through all the different policies you can choose from. To learn more about the different types of life insurance, check out our article on just that.

What life insurance covers

Each policyholder’s life insurance coverage will vary depending on the plan, premiums, and any riders included. That being said, it’s important to remember that a life insurance policy technically covers the death of the policyholder. What the beneficiaries do with the death benefit isn’t monitored.

Types of death

After a policyholder’s death, the noted beneficiaries will receive the policy’s death benefit. Most life insurance policies will provide the death benefit upon the policyholder’s passing through both natural and accidental death.

Natural death. This is death as a result of old age or through an illness, such as a heart attack or cancer.
Accidental death. Though the specifics may depend on your individual policy, “accidental death” typically includes death by a car or other motor vehicle accident or even an accidental overdose.

IMPORTANT! While these causes of death are covered by many life insurance policies, lying on an insurance form is illegal. This includes not disclosing your illness or unhealthy habits in the hope of reducing your premium costs.

Using the death benefit

Though the thought is grim, part of choosing a life insurance policy is considering how much money your family will need once you pass.

Debts. A policy’s death benefit can help pay off various debts, including mortgage payments and even a credit card bill. These debts can be for joint accounts or a cosigned car or piece of property. This could be a huge way to help your loved ones after you pass on. Regardless of what the debts are, remember to include anyone who shares your debts as a beneficiary, as the life insurance claim will only pay to those listed.
Bills. Whether from funeral expenses or everyday life, the bills tend to pile up quickly after a loved one’s death. Fortunately, a life insurance payout can go toward utility bills, groceries, gas, and other expenses.
End-of-life expenses. While living is expensive, unfortunately dying is as well. The average funeral costs about $7,800, and that’s not including any hospital or medication bills that may have preceded your passing. Instead of leaving your family with additional debt, they could use your life insurance policy to pay for these costs.
College tuition. Yes, your death benefit can be put toward your spouse’s or child’s college funds. This could be a great way to ensure your child gets a longed-for education without heavy costs weighing on your spouse’s shoulders.
Investments. Depending on how much your life insurance pays, you may want to talk with your spouse or other family members about how to invest your death benefit. A smart investment has the potential to make a modest benefit last for years to come if you invest wisely.

If you or your family don’t know much about investing, you may want to speak with an investment advisor about your best options.

Pro Tip

Keep in mind that any outstanding federal student loans will likely be forgiven after you pass. So unless one of your family members cosigned on your student loans, your loved ones won’t have to worry about paying down those debts.

What will life insurance not cover?

Unfortunately, life insurance cannot cover every cause of death. Regardless of the policy, life insurance companies will likely not pay your beneficiaries if one or more of the following events occur.

Expired policies

Though a permanent life insurance policy won’t expire, a term life insurance policy could. This depends on how long you want your term life policy to cover. Most policies offer coverage for 10, 20, or 30 years.

However, if you want to protect yourself from an expired policy, talk to your insurance company about convertible term insurance. This type of policy allows you to convert your term life insurance into permanent life insurance, which will then cover you for the rest of your life.

Criminal activity

Your life insurance company may refuse to pay your beneficiaries if you passed while doing something illegal. This is because, among other reasons, most life insurance policies contain a felony exclusion. The felony exclusion states that an insurance company is not required to pay your beneficiaries after your death if you passed while committing a felony.

Although not every life insurance policy includes this exclusion, we definitely don’t recommend testing your insurance company’s limits. Not to mention that committing a felony is, you know, illegal.

Fraud

When you think of “fraud,” you may immediately think of a husband or wife murdering the other and making it look like an accident. But in reality, life insurance fraud is often something as simple as hiding the fact that you’re a smoker or that breast cancer runs in your family.

Most people who get caught doing this just want lower premiums. However, no matter how innocent it may be, “forgetting” to mention your health habits or risky hobbies may result in a legal headache.

Exclusions

As we mentioned above, many life insurance policies will contain a felony exclusion, but that’s not the only exclusion you might see. One exclusion you may hear about regards riskier hobbies, like skydiving or scuba diving.

In this case, your insurance company would agree to lower premium payments but would not pay your beneficiaries a death benefit if you passed while participating in the risky hobby.

Life insurance gray areas

As with most things in the finance world, there are a few fuzzy areas when it comes to life insurance policies. Some of these areas may be addressed within the policy itself or can be addressed in a rider to your policy.

Suicide

Unfortunately, suicide has become a gray area for many life insurance companies because suicidal individuals would take out life insurance policies on themselves before ending their lives. As a result, most life insurance policies will only pay the listed beneficiaries after a policyholder has held the policy for over two years.

That being said, if you or anyone you care for has shown signs of suicidal behavior or discussed similar thoughts, contact the National Suicide Prevention Lifeline at 1-800-273-8255.

Risky hobby

Life insurance companies aren’t big fans of risky hobbies since it increases the risk a policyholder will die. This means your premiums will likely be a lot more expensive if you have dangerous hobbies. But that doesn’t mean you can’t get life insurance at all.

As long as you don’t mislead your insurance company about your activities, you can still get a policy as a scuba diver, skydiver, or base jumper. If you decide to start these hobbies after getting a life insurance policy, your premiums may remain low. However, if your insurance company finds evidence of your interest in these activities before getting your policy, you may find yourself in some legal trouble.

Expenses while living

Most of the time, you can’t access the funds in your life insurance policy while you’re alive. However, some insurance companies will allow you to add an accelerated death benefit rider if you were diagnosed with a terminal illness.

An accelerated death benefit rider allows you to access your life insurance money while you’re still alive. Though most policies don’t limit what you can spend the money on, there are a few catches. For one, some companies will only enforce the rider if you have a certain number of months left to live (the exact number varies). For another, whatever money you take out will be removed from your death benefit.

Does life insurance pay for funeral expenses?

You can use a loved one’s death benefit payout for any funeral expenses, including the reception or cremation afterward. However, don’t confuse this with thinking the life insurance company will pay for the funeral itself.