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What Does Life Insurance Cover?

The unthinkable can happen to anyone—even you. That’s why you need to prepare and make sure your family will be financially secure if tragedy strikes. Life insurance coverage is one of the best gifts you can give your family.

We recommend term life insurance because it’s simple and affordable. And your beneficiaries can use it to cover a lot of different costs, like burial expenses, the mortgage and even the kids’ college funds. But even the best insurance policies have their limits.

Some life insurance will cover certain costs—like long-term care or medical bills—but only if you have certain policy riders (more on those in a minute). And some policies won’t pay out if you die in certain circumstances, like while you’re committing a felony if the policy includes a felony exclusion (yep, we’ll explain that below).

So let’s take a look at the details of what life insurance does cover—and what it doesn’t.

What Is the Main Purpose of Life Insurance?

We can’t talk about what life insurance covers without a quick reminder of the actual purpose of this kind of policy—and that is to replace your income in the event of your death. That’s it! If your life insurance is designed to do anything other than that, it’s probably costing you a lot more than it’s worth. As a rule of thumb, a good term-life policy will cover about 10–12 times your annual income.

What Does Life Insurance Cover?

Strictly speaking, the only thing a life insurance policy covers is the death of the person insured. But you might be wondering if that includes both accidental and natural causes, or the kinds of things people usually pay for with their insurance payout.

Natural Death

In the event you die from natural causes, your life insurance would apply, and your beneficiaries would receive the insurance payout—called a death benefit.

Accidental Death

Your policy would also cover your death from a motor vehicle accident, poisoning, accidental overdose or any other tragic accident.

End-of-Life Expenses

Like we already mentioned, the primary purpose of a life insurance policy is to replace the loss of income. But when it actually happens, it’s amazing how many costs there can be when someone passes away. And they all start to add up—funeral costs alone run $7,000–10,000 on average. That’s a lot of money for your family to come up with, especially when they’re grieving.

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We don’t want to scare you, but that kind of financial strain has torn families apart. But when you have life insurance, burial costs won’t even be a concern. Your family can use the death benefit to pay for a celebration of your life. And then they can focus on the important business of grieving and healing.

Debts

Life insurance can also bring your family debt freedom. Whether you still owe money on the house or you pass away before you finish Baby Step 2 (paying off non-mortgage debt), your loved ones can use your life insurance to pay back what you owed.

That’s a huge weight off their shoulders. Imagine your grieving family living in a paid-for home, driving a paid-for car, with no monthly payments on anything. They would be comfortable and well taken care of, and they’d have you to thank for it.

Just be aware that anyone you share debt with—like your spouse or the uncle who cosigned on your car—needs to be named as a beneficiary on your life insurance policy. Otherwise, they won’t get the money or be able to pay off the debt.

And remember that federal student loans—including parent PLUS loans—are forgiven if something happens to you. So unless they cosigned your loan, your family doesn’t owe the government a penny for your education if you pass away.

Everyday Bills

Electricity. Phone. Trash service. Insurance. It seems like every day, there’s another bill in the mail. Throw in the fact that your kids are constantly eating and growing, and your family’s got a lot of expenses to cover.

That’s what life insurance is for. It’ll keep the lights on, the car running and the kids fed. And trust us: When your cute toddler turns into a teen who eats their weight in food every week, your spouse will be super grateful that your life insurance is covering the grocery bill!

Seriously, your family can use your death benefit to cover daily living expenses for months or even years. Instead of your spouse going to work every day because they have to, imagine them getting to stay home and take care of the kids and themselves during the grieving process. That’s why life insurance matters.

Expenses for Dependents

Speaking of kids, a term life policy helps you leave them a lasting legacy. Your spouse can use your death benefit to pay for childcare or medical care. Lucy breaks an arm on the trampoline? Covered. David has special needs that require an in-home aide? Yes, that’s covered too.

Your family can even use that money to get a head start on saving for the kids’ college. And if there’s anything left over, your life insurance payout can be a great way for your spouse to support your kids’ passions—like paying for lessons or giving them the opportunity to travel.

Investments

Your life insurance payout isn’t just for the kids and bills. It’s for your spouse too. The right amount of term life coverage can set them up for financial peace for the rest of their lives. Coach your spouse to invest your life insurance payout so they can live on the interest it earns.

You can even start working with a qualified investment pro now. That way, your spouse will already have a trustworthy financial advisor who can help them keep growing the nest egg you started, even after you’re gone. They’ll be able to pay off any debts, live out their dreams and even retire early. Now that’s the kind of legacy you want to leave the person you love the most.

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What Life Insurance Does Not Cover

Term life insurance can do many wonderful things for your family, but there are certain things that your life insurance does not cover. If you die during any of these situations, then that payout your loved ones are counting on will be a no-go.  

Expired Policies

Term life policies don’t last forever. That’s why it’s called term insurance—because it’s for a set time period. If you pass away after that time frame, your family won’t receive a death payout.

That’s why it’s super important to make sure you know when your policy expires—and to have a plan for when that happens. Many term life insurance policies include an option to renew on a year-to-year basis when the term expires, even if your health has changed. But keep in mind that your premiums will definitely change, and the cost to extend life insurance coverage for older applicants is way higher.

Or if you follow the 7 Baby Steps, you’ll eventually have such a big nest egg that you’ll be self-insured and won’t even need a life insurance policy!

Insurance Fraud

When most people think of insurance fraud, they think of dramatic movie scenes—you know, the ones where the husband fakes his own death, the wife collects the payout, and they become millionaires hiding out on a tropical island.

You wouldn’t do anything that crazy, even if you thought you might be able to get away with it. (Which, for the record, you can’t.) But the insurance company has a much broader definition of fraud. And you may actually be committing insurance fraud right now.

First the good news: it’s rare for fraud to cause life insurance to be canceled for policyholders while they’re still living. It’s also unusual for fraud to cause a death benefit to be withheld from the beneficiary of someone who has died. In the latter situation, the outcome has a lot to do with the timing of the policy purchase and the person’s death.

Let’s look at an example. Let’s say your Aunt Sally, a regular smoker, applies for life insurance. But she keeps her cigarette habit a secret in the application, hoping to save on her premiums. Sure enough, she gets a policy in place. At that point, a two-year countdown starts that will limit how long the company can challenge the validity of the policy relating to Sally’s health.

If poor Aunt Sally happens to pass away in month 23 of her policy—or at any point before—and her medical records show she a smoker all along, the insurance company won’t withhold the death benefit. They’ll simply recalculate what her rate should have been at the time the policy was written, and then reduce her death benefit by the amount she should have paid all along.

But if she survives that initial two years, the fact she concealed her smoking habit no longer affects the standing of the policy. This rule is more about helping the company recoup losses from an applicant’s dishonesty than it is about punishing their beneficiaries.

The only situation where the company would withhold a death benefit or rescind a policy completely would be if they find new information you hid during your application that would have made them decline you in the first place—and smoking is not an example of such a dealbreaker. The bottom line is to make sure you’re honest about everything up front. You might pay a little more, but it’s worth the extra few bucks to make sure your loved ones are taken care of.

What Life Insurance Might—or Might Not—Cover

So far, everything we’ve talked about has been pretty clear cut. Either life insurance pays for something, or it doesn’t. But there are some gray areas when it comes to what your life insurance does or does not cover.

If a gray area isn’t addressed in the policy itself, you can usually cover it with a rider—an extra section of your policy that lets you add benefits. Make sure to talk to your life insurance agent about any riders you might need so your loved ones are protected in situations like these.

Exclusions

Do you have a risky hobby alongside your desire to save money? Like say you’re an amateur pilot without much flying experience, but you don’t want to pay an exorbitant upcharge on a life insurance policy. Well, you may be able to get an exclusion added to your policy related to your risky pasttime, and still enjoy perfectly affordable premiums!

Not all insurance companies offer exclusions for hazardous activities, but some will allow you to get a policy at a cheaper price if you agree to not take a payout if you pass away while participating in them – these are most commonly used for scuba diving and automobile racing. 

But remember what the exclusion means—you’re putting a very specific limitation on how the policy benefits your family in order to save money. That’s not necessarily good or bad, it’s just a choice you and your family have to make when shopping.

Death by Risky Hobby

On a related note, you can get a policy that does cover that risky hobby. But it’s likely going to show up in your premiums. Are you a scuba diver? Do you enjoy base jumping on the weekends? Your life insurance company’s not a fan of these—or any other—high-risk hobbies. Sorry, but it’s a bottom-line thing.

While you’re alive, you pay the insurance company. But once you die, they pay your loved ones a lot more than you were paying—hundreds of thousands more. And the more risky stuff you do, the more likely the insurance company will have to fork over your death benefit.

This doesn’t necessarily mean that you can’t be insured—the life insurance company will just charge you a higher premium to make up for those risks. At the same time, if you get a life insurance policy in place and only later start a new and risky hobby, you’ll still be covered without a hike to your premium—as long as the company doesn’t find evidence you were planning to take it up while you were applying.

What you don’t want to do is mislead the company about your plans. For example, imagine you’re in the process of applying for life insurance. Then let’s say you signed up for a scuba class, but never dove into that fact with the insurance company. If you then had a tragic scuba accident after the policy was active for a year, the company would not pay out. Why not? Because they’d know you had intent to begin the risky activity and did not disclose it.

Just make sure to ask questions, and be completely open and honest about your hobbies when applying for life insurance. You don’t want to think your life insurance covers your passion for hang gliding or rock climbing, only for your family to find out that it didn’t cover those things at all.

Lapsed Policies

Sometimes we all forget a due date or misplace a bill. The late penalties are annoying, but in the case of life insurance premiums, missing that payment could cause your policy to lapse—and your coverage to vanish!

The good news is that if your policy lapses, you might be able to get it reinstated. Here’s how that works:

  • Check if your policy has a grace period before it lapses completely. If so, be sure to rush that payment in pronto!
  • If the grace period is already past, the insurance company is going to need what’s called an attestation, which is fancy talk for a document stating your health status hasn’t changed.
  • It’s also possible the company could pull your medical records again, or you might have to go through another medical exam.
  • What if your health has changed for the worse since the policy was first put in place? The insurance company might choose not to reinstate.

Criminal Activity

This should be a given, but just in case it isn’t: If you get killed while you’re doing something illegal, your beneficiaries might not receive the insurance payout. But they’d only miss the death benefit in the case of a Felony Exclusion in the policy. Many policies do exclude that kind of payout, but not all.

For example, let’s say someone’s life insurance policy features the felony exclusion. If they break into a house and the homeowner kills them in self-defense, the thief’s family won’t get a penny. They’ll be stuck paying for the funeral expenses, their regular bills and possibly even legal fees if the homeowner decides to sue.

The good news is that the felony exclusion rule also works in your favor—sort of. If your beneficiary kills you under a felony exclusion policy, they’re not going to get the money. We know that isn’t super comforting, but at least they won’t get rich from murdering you.

Death by Suicide

Life insurance companies usually pay out death benefits in the case of suicide—but there’s also usually a catch. In most cases, beneficiaries can only collect the insurance payout if the policy is at least two years old or older.

Sadly, there’s a reason for this rule. It’s designed to help keep people from getting last-minute life insurance policies before committing suicide. With the two-year rule, life insurance companies hope to discourage people from leaving their families financially unprotected and encourage them to pursue help and healing.

(If you or someone you know is struggling with suicidal thoughts or behaviors, there is hope. And there is help. Contact the National Suicide Prevention Lifeline at 1-800-273-8255.)

On another note, when suicide occurs before the two-year exclusion period, the beneficiary typically receives a refund of any premiums the deceased had already paid.

Expenses While You’re Alive

Most life insurance companies offer a rider, known as an accelerated death benefit rider, that allows you to access your death benefit while living—if you’re diagnosed with certain terminal illnesses. Another condition: you, as the insured, must have been deemed to have a certain amount of months to live, which will vary by carrier. The amount you can claim will also be defined in the rider itself, paying out a full or partial benefit.

And there’s no limit on how the money can be used. Facing a tough end-of-life situation, it would be a relief to be able to pay ahead on things like your mortgage, groceries, or even a vacation. An ADBR is typically built in to a term life policy and does not impact the premium; if you decide to utilize this benefit, there is only a small administrative fee deducted from the benefit at the time the ADBR is enacted.

Using an accelerated death benefit can help keep your family debt-free and your investments intact. But there’s a drawback—if you spend your life insurance money while you’re still alive, there will be less for your family after you’re gone.

For instance, let’s say Joe has a $1 million term life policy and is diagnosed with a terminal illness. He takes an early payout of $350,000 to take care of several urgent needs while he still has time. When he passes away, his wife gets the other $650,000.

Unfortunately, with serious long-term illnesses, costs can rack up much higher than that—even with health insurance. Be aware of how much you’re spending and consider how to best get yourself and your loved ones the care and protection you need.

Long-Term Care

Long-term care generally includes any temporary or end-of-life care a person needs to receive for an extended period of time—usually more than 3–6 months. Nursing homes, assisted living facilities, injury rehabilitation centers and in-home services like meal delivery and transportation services are examples of long-term care.

Since long-term care includes such a wide range of services and situations, it’s unlikely that your insurance will cover all of them. But if you have an accelerated death benefit rider, you’d be able to cover long-term care costs through your life insurance. (Reminder, you can only use the ADBR in the event of a terminal diagnosis.) But to repeat ourselves, the ADBR option means you’re using the money from your death benefit—so there will be less for your family after you pass.

Instead of wiping out your life insurance, you may want to learn about long-term care insurance. It’ll cover way more costs in way more situations than taking an early life insurance payout, and it’ll leave your death benefit intact so your loved ones will be financially secure when you’re gone.

Disability

Disability is another gray area when it comes to life insurance. But generally speaking, you won’t be able to take an early life insurance payout to cover short-term disabilities that last less than 90 days.

Like paying for medical bills or long-term care while you’re alive, you may be able to use an ADBR to cover the costs of long-term disabilities. In this case, you’d need to be not only disabled but also have a terminal diagnosis—thankfully a quite rare combination of problems. But again, this brings up the same problem: early access cuts into your family’s financial future.

So it’s generally a good idea to have separate long-term disability insurance to cover these costs. That way, you don’t have to pull money away from your family. But unlike long-term care insurance—which is typically best for people over 60—you should have long-term disability coverage no matter how young or old you are, because accidents can happen at any age.

Leaving a Legacy

You made it! We hope you feel a lot more confident knowing what life insurance does and doesn’t cover. But let’s face it, there are still a lot of details associated with life insurance. That’s why it’s so important to work with an insurance company you can trust to help you get the right coverage at the right price.

Because at the end of the day, it’s all about one thing: protecting the people you care about most. So what are you waiting for? Get your free quote today with RamseyTrusted provider Zander Insurance and leave your loved ones a lasting legacy.

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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