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What Does Life Insurance Actually Cover?
TL/DR What exactly does life insurance cover?
After you die, your family could be in a lot of financial trouble because of funeral costs and normal living costs. You might want to buy a life insurance policy to help your loved ones get ready for this possibility.
In general, life insurance gives money to the person or people you choose to receive it when you die. But there are many kinds of life insurance, so it can be hard to know which one is best for you. Bankrate looked closely at what a life insurance policy covers to help you find your way around what can seem like a confusing market.
What is it that life insurance pays for?
Life insurance is a type of policy that pays a death benefit, which is a sum of money, to the people you choose when you die. The main purpose of life insurance is to help your loved ones financially after you die. The money from a life insurance payout can be used in a number of ways, such as to pay for end-of-life costs, to pay off debts, to replace lost income, to help send kids to college, to leave a financial gift, and more.
Bills and expenses paid every month
Life insurance is mostly used to replace your income for those who depend on it. To figure out how much coverage you need, it can be helpful to work with an agent or use a life insurance calculator. So, you can be sure that your loved ones will be taken care of when you die.
When the beneficiary gets the death benefit, they can use the money to pay bills like groceries, utilities, and child care, as well as any other costs that come up. There are no limits on what kinds of costs you can pay for with a death benefit.
Costs to pay off debt can be hard on anyone's budget, but it can be even harder to pay off debts you co-signed after losing a loved one's financial support. The cost of a mortgage, a car loan, and other debts can add to financial stress. Getting a death benefit can help your family pay for these expenses without having to worry about it.
The cost of college and education
If you pay for your child's college tuition or education, you might want to think about these costs when you buy a life insurance policy. So, if you die, you'll still be able to help your child pay for college. When you figure out how much life insurance you need, adding the cost of college could make a big difference in how much you need. The average cost of tuition and fees per year at different schools is currently around:
- Public two-year college in the same district: $3,800
- Public four-year college in the same state: $10,740
- Public four-year college outside of the state: $27,560
- Private four-year non-profit college: $38,070
Remember that these numbers are for the whole year and don't include other costs, such as room and board, meal plans and other food, books and supplies, or transportation. Because the people who get money from life insurance can spend it however they want, including college costs in your death benefit amount could be a big help after you're gone.
Costs related to dying
Life insurance also helps pay for your funeral and other costs after you die. These could include the cost of your funeral, the cost of a casket, and the cost of a party. Any life insurance policy’s death benefit can be used to pay for funeral costs. But if that's the only insurance you need, you might want to look into final expense insurance. This kind of permanent life insurance has a small death benefit, usually no more than $25,000. It is usually approved without a medical exam. But final expense coverage may be more expensive for the amount of coverage you're likely to get than other types of insurance.
Child care or dependent care
Life insurance can help pay for daycare, after-school programs, nannies, and other costs that come with taking care of children. If you die, the death benefit from your life insurance could also help pay for the costs of caring for an elderly parent or another dependent.
Costs for medical care and long-term care
Life insurance is mostly used to help your family financially after you die, but you can sometimes use it to help yourself. Life insurance with living benefits gives you ways to use your coverage while you are still alive. You can choose from different types of living benefits based on your needs. For example, many companies offer a "accelerated death benefit rider," which lets you get a portion of your death benefit before you die if you have a terminal illness. This could help you pay for your medical bills while you're still alive, making it easier on your family after you're gone.
Even though this is often a great benefit, you should know that if you use some of your death benefit before you die, the total amount paid to your beneficiaries after your death will be less. Also, living benefits are not the same as long-term care insurance, which can help protect your finances from the effects of high medical costs over a long period of time.
In addition to covering the cost of your funeral, life insurance can also pay for the costs of setting up your estate after you die. Estate planning is a little different from paying for end-of-life expenses in that you need to hire a lawyer to close any accounts left in your name and report your death to the county and IRS. Many people don't realize that their children or grandchildren may still owe taxes to the IRS. A life insurance policy can help them pay for these taxes so they don't have to worry about extra costs.
Life insurance is easy to see as a good thing to buy. After all, it helps your family feel safe about money after you're gone. But there's more that life insurance can do. You could leave money to your beneficiary, your children, an organization, or a charity through your life insurance policy. If you decide to do this, just make sure you buy enough insurance. You'll probably still want your family to get enough money to cover their daily costs, debts, and the other costs listed here.
What is NOT taken care of by life insurance?
A beneficiary of a life insurance death benefit can use the money in any way they want. But in some cases, a death benefit might not be paid out, which means that the beneficiary wouldn't get the money when you died.
- Policies that have expired or lapsed: If your life insurance policy is no longer in effect when you die, your beneficiary won't get the death benefit. For example, term life insurance will cover you for a certain number of years. Once the term is over, you are no longer covered. Permanent life insurance policies, such as whole life and universal life, usually don't expire. However, if your premium isn't paid, your policy could still lapse.
- Suicide: Many life insurance policies have a clause that says suicide is not covered for the first two years. If you die while the clause is still in place, no money will go to your beneficiaries.
- Life insurance policies have a time frame during which they can be challenged. Usually, this is two years after the date your policy starts. If you die during this time and your insurance company finds out that you lied on your application, your beneficiaries may not get the money.
- Exclusions: Exclusions are rare, but some insurance companies have them. They list situations in which your beneficiary might not be able to get a payout, like if the policyholder dies while doing something dangerous. Most exclusions have to do with deaths caused by dangerous jobs or hobbies, but your policy may have other exclusions as well. Make sure to read your policy so you know what it covers.