What does life insurance cover?

Life can be unpredictable. When the unthinkable happens, life insurance can provide a safety net for when your family needs it the most. Your beneficiary can use the death benefit payout from your life insurance to help your family maintain their lifestyle, pay off your mortgage or secure your children’s education. Bankrate’s insurance editorial team breaks down what life insurance covers, what it doesn’t and how you might use it based on your individual coverage needs.

What does life insurance cover?

A traditional life insurance policy is designed to cover the life of an insured individual, providing financial support to beneficiaries upon the insured’s death. Understanding what life insurance does is vital, as it typically covers both accidental and natural causes of death, offering comprehensive protection for the policyholder’s beneficiaries. Two lives can even be covered in some cases, such as survivorship and first-to-die policies.

These various aspects of coverage ensure that life insurance policies can cater to a wide range of needs and circumstances. However, it’s important to understand the specifics of what each type of policy covers and any potential exclusions or conditions that might apply. Here are some limitations on coverage to be aware of:

• Accidental death and dismemberment (AD&D) policies: These policies are generally more affordable but only cover deaths resulting from accidents, excluding natural causes. They may also provide benefits for serious injuries like loss of limbs or eyesight.
• Graded death benefit policies: Policies like guaranteed issue life insurance often have a graded death benefit period, typically the first two years. During this period, if the insured dies from natural causes, the beneficiaries may receive a return of premiums paid plus interest instead of the full death benefit. However, deaths from accidents during this period are usually covered fully.
• Suicide clause: Life insurance policies generally cover death by suicide, but not while the suicide clause is in effect, which is typically the first two years of the policy. After this period, suicide is usually covered, but it’s important to read the policy terms carefully.
• Homicide or manslaughter: Deaths caused by homicide or manslaughter are generally covered. However, if the beneficiary is suspected of involvement in the death, the insurance company may delay the payout until an investigation clears the beneficiary of any wrongdoing. This ensures that the policy’s proceeds are not used to benefit anyone involved in illegal activities.

Some additional considerations to keep in mind as it pertains to answering the question of what does life insurance cover:

• Natural causes: Traditional life insurance policies cover deaths due to natural causes, including illness, old age or any other health-related reasons. This provides a safety net for families relying on the policyholder’s income or support.
• Accidental causes: Beyond AD&D policies, traditional life insurance policies also cover accidental deaths, ensuring a broad scope of protection.
• Riders and additional coverage: Many life insurance policies offer riders that can provide extra benefits. For example, an accelerated death benefit rider allows policyholders to access a portion of their death benefit if diagnosed with a terminal illness. These riders can offer additional financial support during challenging times.

Understanding what life insurance covers is a crucial step in selecting the right policy. Traditional life insurance policies provide coverage for a range of scenarios, making sure that beneficiaries receive financial support regardless of the cause of death.

What is life insurance used for?

Life insurance is a type of insurance policy designed to provide a death benefit — a sum of money — to your selected beneficiaries after your death. The primary function of life insurance is to provide financial support to your loved ones after your passing. The payout from a life insurance policy can be used in a number of ways, including:

• Paying for end-of-life expenses
• Paying off debts
• Replacing lost income
• Paying for college tuition
• Leaving a financial gift
• Financial needs for business owners

There may even be other options you or your loved ones decide the life insurance can be used for.

Monthly bills and expenses

One of the main uses of life insurance is to replace income for those who depend on it. This is why it can be helpful to work with a licensed agent or financial advisor or use a life insurance calculator to determine how much coverage you need.

Upon receiving the death benefit, your beneficiary can use the money to pay for bills, including grocery, utility and childcare bills, as well as other costs that may pop up. There aren’t restrictions on what kinds of expenses you can use a death benefit to pay for.

Co-signed debts

Many types of debt — mortgages and car loans included — are not forgiven upon your death. Debt repayment can be tough on anyone’s budget, but paying down debts on which you co-signed after losing a loved one’s financial support can be even tougher. Your beneficiaries can use the death benefit you provide to help ease the burden.

College tuition and education

If you’re financially responsible for your child’s college expenses, you may want to consider those costs when you purchase a life insurance policy. Adding the cost of college into your life insurance calculations could dramatically increase the death benefit amount that you need. Because life insurance beneficiaries can spend a payout however they see fit, incorporating college prices into your death benefit amount could provide significant support after you’re gone.

Below is the average annual cost of tuition and fees for the 2023–2024 school year at various institution types. Keep in mind that these figures are annual and don’t include living costs, books, supplies or other expenses. Rates can also vary widely by state and institution.

• Public two-year in-district college: $3,990 per year
• Public four-year in-state college: $11,260 per year
• Public four-year out-of-state college: $29,150 per year
• Private nonprofit four-year college: $41,540 per year

End-of-life expenses

Another primary function of life insurance is to pay for your end-of-life expenses. These could include your funeral costs, the price of a casket and the expense of a reception. If that’s the only coverage you need, though, you may want to consider final expense insurance. This type of permanent life insurance provides a small death benefit — usually no more than $25,000 — and generally doesn’t require a medical exam for approval. However, compared to other policy types, final expense coverage may be more expensive for the amount of coverage you’re likely to get.

Child care or dependent care

From daycare and after-school programs to nannies and other expenses, life insurance policies can help cover the cost of childcare. If your beneficiary is also taking care of an aging parent or other dependent, a life insurance death benefit could help with those costs, too, if you pass away. It’s also important to consider life insurance for a stay-at-home parent. While they may not contribute financially, their role in providing childcare and managing household responsibilities is often invaluable. Replacing these services could incur significant costs such as hiring full-time childcare, house cleaning services and other domestic help, making life insurance an important safeguard for the family’s financial stability.

Medical expenses and long-term care

While life insurance is primarily used to provide financial support for your loved ones, life insurance with living benefits can provide options for you to use your life insurance coverage while you are still alive. There are different types of living benefits you can choose from, based on your needs.

• Accelerated death benefit rider: Provides you with access to a portion of your death benefit prior to your passing if you’ve been diagnosed with a terminal illness. This may help you pay for medical expenses while you’re still alive, reducing the financial burden on your loved ones after your passing.
• Critical illness death benefit rider: Allows you to access a portion of your death benefit if you are diagnosed with a critical illness, helping to cover medical and other expenses.
• Chronic illness death benefit rider: Offers access to your death benefit if you become chronically ill and are unable to perform at least two activities of daily living, such as bathing or dressing.
• Long-term care rider: Helps cover the costs of long-term care services if you need extended medical care, providing financial support for services such as nursing home care or in-home health care.

While these riders can often be a great benefit, using a portion of your death benefit early will effectively reduce the total amount paid to your beneficiaries after your death. Additionally, living benefits aren’t the same as long-term care insurance, which can help shield your finances from the effects of extended medical costs.

Estate planning

In addition to funeral costs, life insurance can cover the cost of estate planning following your death. Estate planning is a little different from end-of-life expenses in that it often involves securing an attorney to close out any remaining accounts in your name and officially report your death to the county and IRS. Many people fail to realize that descendants may still owe income and/or estate taxes to the IRS, and a life insurance policy can help them cover these costs so they do not incur an unnecessary financial burden.

Leaving a legacy

It’s easy to see life insurance as a practical purchase. After all, it’s helping your loved ones feel financially secure after your passing. But life insurance can go a step further. You could use your life insurance policy to leave a financial gift to your beneficiary, your children, an organization or a charity. If you choose to do this, you’ll probably want to think through your loved one’s needs and your financial wishes to ensure you buy an appropriate amount of coverage to finance both.

Business planning

Life insurance can also play a critical role in business planning by offering various forms of coverage to ensure the continuity and stability of a business. Here are some key applications:

• Key person insurance: This type of policy provides financial protection to a business in the event of the death of a key employee whose skills, knowledge and expertise are crucial to the company’s success. The death benefit can help cover the costs of finding and training a replacement, as well as compensate for any potential loss in revenue.
• Business succession planning (buy/sell agreements): Life insurance can fund buy/sell agreements, which are arrangements between business partners or shareholders outlining what will happen to the business if one of them passes away. The death benefit provides the necessary funds for the surviving partners to buy out the deceased partner’s share, ensuring a smooth transition and continued business operation.
• Collateral assignment: This involves using a life insurance policy as collateral for a loan. In this arrangement, the lender becomes the beneficiary of the policy. If the borrower dies before the loan is repaid, the death benefit covers the remaining debt, protecting the lender and relieving the borrower’s family or business from financial burden.

What does life insurance not cover?

As mentioned, there aren’t any limitations on how a beneficiary can use a life insurance death benefit payout. However, in some cases, a death benefit may not be paid out, which means that the beneficiary wouldn’t get the money upon your death. Understanding what life insurance does not cover is essential. Here are a few examples of when this might occur.

• Expired or lapsed policies: If your life insurance policy is no longer active when you pass away, your beneficiary will not receive the death benefit. Term life insurance, for example, covers you for a specific number of years. Once the term ends, your coverage is no longer active (although most term policies include renewal or conversion options). Permanent life insurance policies, like whole life and universal life, have long coverage periods (typically to ages 95 to 121) but may still lapse if your premium isn’t paid or the policy doesn’t perform as expected.
• Suicide: Many life insurance policies contain a provision that death by suicide is not covered for the first two years. If you die by suicide while the clause is still in place, your beneficiaries may not receive a payout.
• Fraud: Life insurance policies come with a contestability period. This is usually a two-year period following the date your policy starts. If you pass away during this time and your insurer discovers that you intentionally misrepresented something on your application, your beneficiaries may be denied the payout.
• Exclusions: While rare, some insurance carriers include exclusions that identify specific circumstances in which your beneficiary may not be eligible to receive a payout. A couple of examples would be:
• Avocation exclusions: These exclusions can apply if the policyholder dies as a result of engaging in hazardous activities or risky hobbies. For instance, if the insured frequently participates in extreme sports like skydiving, scuba diving or rock climbing, the insurance company may exclude coverage for deaths related to these activities. Similarly, if the insured works in a dangerous profession, such as being a commercial fisherman, pilot or construction worker, the policy may not cover deaths resulting from job-related incidents. These exclusions help insurers manage risk by not covering inherently high-risk activities.
• Acts of war and terrorism: Deaths resulting from acts of war or terrorism are commonly excluded from coverage. If the insured dies due to military conflict, terrorist attacks or similar events, the beneficiary might not receive the death benefit. This exclusion is particularly relevant for individuals in the military or those living or working in areas with high political instability. It is important to understand that this exclusion is designed to protect insurers from the unpredictable and often large-scale losses associated with such events.

Frequently asked questions

• How much life insurance do I need?

  How much life insurance coverage you need, if you need any at all, depends on the unique financial needs and commitments of you and your family. Some factors to consider when choosing your coverage include your annual income and how many children you have (if any). Many insurance professionals recommend you speak with a licensed agent or financial advisor to review your life insurance options and financial goals before purchasing your policy.
  

• When does a life insurance policy pay out?

  Your life insurance policy generally pays out after your death, although some policies have living benefits you can use while you’re still alive. How long it takes for your beneficiary to receive this payout can vary. For example, the insurance company may launch an investigation if you pass away during the contestability period. This investigation will need to be complete before the death benefit is released. The same situation may occur if it appears that you died by suicide during the first two years of the policy. Additionally, your life insurance company will need time to calculate your payout if you borrowed or made a withdrawal from your permanent life insurance policy. You can help to alleviate unnecessary stress for your beneficiaries if you explain to them what your life insurance policy is, how it works and what it covers.
  

• Do you need life insurance if you have no dependents?

  If you’re single, your need for life insurance will depend on your financial goals and overall circumstances. If you take care of any loved ones, such as a parent or sibling, you may want to purchase a life insurance policy to take care of their financial needs after your death. If you have co-signers on a leased or financed vehicle, your co-signer could be left with the debt after you pass away. You may consider taking out a life insurance policy to protect their finances. If you’re not sure if you need coverage, speaking with a life insurance agent or financial advisor can help you determine if coverage makes sense for your situation.
  

• Do children need life insurance?

  Buying life insurance policies for children is often unnecessary. However, a children’s whole life policy can have benefits. For instance, life insurance rates increase as you get older, so buying permanent life insurance for a child could help them keep a low rate as they age. Additionally, if your child develops health problems as they age, it may be harder to get life insurance coverage. This may be something to consider if chronic illnesses run in your family. Buying a policy at a young age can help protect their insurability in the future.

  Another option to consider is adding a child rider to your existing life insurance policy. A child rider provides a death benefit if a covered child passes away. This rider is usually more affordable than purchasing a separate policy for each child and can provide coverage until the child reaches a certain age, often 18 or 25. At that point, the rider can typically be converted to a permanent life insurance policy for the child without requiring a medical exam, ensuring continued coverage into adulthood. This approach not only helps provide financial protection but also helps secure the child’s future insurability.

• How much does life insurance pay out?

  The amount a life insurance policy pays out depends on the policy type and the coverage amount you select. Generally, life insurance payouts, also known as death benefits, are not subject to income tax. However, it’s a good idea to consult with an insurance professional to understand any specific tax implications related to your policy.