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 the right 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 crime.
So let’s take a look at the details of what life insurance does cover—and what it doesn’t.
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.1 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 insurance payout—called a death benefit—to pay for a celebration of your life. And then they can focus on the important business of grieving and healing.
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.
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.
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.
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.
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. You can usually renew your old policy, even if your health has changed. Just keep in mind that your premiums might change too.
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!
This should be a given, but just in case it isn’t: If you get killed while you’re doing something illegal, your beneficiaries will not receive the insurance payout.
For example, if someone breaks 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 no-criminal-activity rule also works in your favor—sort of. If your beneficiary kills you, 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.
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.
For example, did you tell the insurance company you don’t smoke but you really do? If they find out, they won’t pay your beneficiary. In fact, if they find out before you die, they may go ahead and cancel your policy for lying.
So 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 definite 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.
Death by Risky Hobby
Are you a private pilot? 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.
So your insurance policy may say if you die doing that activity, they don’t have to pay out your death benefit. But more than likely, you can still get insured—the life insurance company will just charge you a higher premium to make up for those risks.
Just make sure you ask about this. 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.
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.)
Medical Expenses While You’re Alive
Most life insurance companies will pay for your medical expenses while you’re still alive—if you’re diagnosed with a terminal illness like Alzheimer’s, emphysema or certain cancers. You’d also need to have a rider on your policy that lets you take an early payout—called an accelerated death benefit—to afford end-of-life care and treatments like chemotherapy.
Using an accelerated death benefit to pay for medical expenses can help keep your family debt-free and your investments intact. But there are a couple drawbacks. That rider could add to the cost of your monthly premium. And much more significantly, 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 dementia. He takes an early payout of $350,000 to cover his treatments and end-of-life care. 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 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.
You may be able to cover some types of long-term care costs with an accelerated death benefit rider. But since long-term care includes such a wide range of services and situations, it’s unlikely that your insurance will cover all of them. And again, 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 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 accelerated death benefit rider to cover the costs of long-term disabilities. But again, this brings up those same problems: It can increase your monthly premium, and it 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 Ramsey Trusted provider Zander insurance and leave your loved ones a lasting legacy.