If you’re thinking about buying life insurance, it’s important to understand how the policy works — including what it pays for and what it doesn’t. Here’s what life insurance covers and how your loved ones can use the payout after you die.
What does life insurance cover?
Life insurance covers the life of an insured person. If that person dies while the policy is in force, the life insurance company will pay a sum of money — called the death benefit — to that person’s beneficiaries. Life insurance beneficiaries can be people, such as your spouse, or entities, like a trust or charitable organization.
Say you die with a $300,000 life insurance policy, and your husband is your only beneficiary. Assuming you hadn’t accessed any of the death benefit in advance, the insurer would pay the $300,000 to your husband. He could put the money toward a variety of expenses, including mortgage payments, college tuition for your kids or the bills from your funeral.
Some life insurance policies cover two people’s lives. Joint life insurance may pay out after the first or second person dies, depending on the type of policy you choose.
What expenses can life insurance cover?
Life insurance is primarily designed to replace your income and ease the financial burden on your loved ones when you die. Beneficiaries can spend a life insurance payout on anything they’d like. But when you’re trying to figure out how much life insurance you need, the following are some common expenses you may want them to be able to cover after you’re gone.
Your mortgage and other debts
Life insurance can pay off your mortgage so your family doesn’t have to worry about how to make future house payments without your income. Many homeowners buy coverage equal to their remaining mortgage balance for this reason.
You may also want enough life insurance to pay off other outstanding debts such as private student loans, especially if there’s a co-signer who will be left responsible for the balance.
Even if you don’t have a co-signer, a policy can help your loved ones pay loans that are linked to their livelihood, such as a car loan. Plus, it protects their credit scores from any damage caused by late or delinquent payments.
Child, household and dependent care
If a family’s primary wage earner dies and a stay-at-home parent has to go back to work, life insurance can help cover expenses like day care and summer camps.
Stay-at-home parents often perform a lot of unpaid labor, such as cooking, cleaning and driving the kids around. If they die, the working parent would need to take over those household duties or hire people to help. The payout from a life insurance policy can step in to help keep the household running smoothly.
The same goes for other dependents. Say you’re the primary caregiver for your aging mom. If you die before she does, a life insurance payout could go toward in-home nurses to take your place.
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Life insurance can also take care of expenses associated with raising a special needs child, such as specialized equipment. A life insurance policy can bridge the gap where your health insurance falls short.
College tuition and other educational expenses
The cost of tuition at a private college or high school can run tens of thousands per year. Having enough life insurance to pay for your children’s education will leave your grieving family one less burden to deal with and help your kids graduate without student debt.
Final expenses
Funeral and end-of-life expenses can add up quickly — the median cost of a funeral and burial is $8,300, according to the latest data from the National Funeral Directors Association.
And if you die after a long illness, there may be lingering medical bills to pay, too.
Everyday living expenses
Aside from the bigger-ticket items above, life insurance can also cover other common costs such as utilities and groceries after you’re gone, allowing your family to maintain their way of life.
What causes of death does life insurance cover?
Depending on the type of policy you have, life insurance will generally cover:
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Natural deaths. Dying from a heart attack, disease or old age would be considered a natural death.
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Accidental deaths. Accidents may include car crashes, drowning or falling. Some policies offer accidental death benefit riders, which increase the payout if you die in an accident.
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Life insurance is a crucial financial safety net for many people, providing a payout to beneficiaries in the event of the insured person’s death. However, there are certain circumstances in which life insurance may not cover the insured person’s death.
For example, if the insured person dies while committing a crime, such as driving under the influence, the beneficiaries may not receive the death benefit. Similarly, engaging in high-risk hobbies like skydiving can also void the policy.
It’s essential to be honest on your life insurance application, as misrepresentation can lead to the cancellation of the policy or refusal to pay out after your death. Additionally, some policies may exclude death as a result of war or terrorism, or while visiting specific countries on the State Department’s travel advisory list.
Life insurance riders are add-ons that can expand your coverage, offering benefits such as access to the death benefit while you’re still alive for medical expenses or long-term care. These riders may come at an additional cost but can provide valuable protection.
Term life insurance typically lasts 10 to 30 years, with no payout if you outlive the policy term. Permanent life insurance, on the other hand, is designed to last your entire life and may accumulate cash value that you can access during your lifetime.
It’s important to keep up with your premiums to ensure your policy remains in force, as lapsing coverage can result in your beneficiaries not receiving a payout. By understanding what life insurance covers and what it doesn’t, you can make informed decisions to protect your loved ones financially. article to make it more engaging and informative:
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