You can choose term or permanent life insurance, mostly depending on how long you want coverage to last.
Most policy benefits can be used to help cover expenses such as monthly bills, co-signed debts and end-of-life costs.
Life insurance won’t cover all situations. Expect to lose coverage for fraud, criminal activity and other exclusions.

 

A life insurance policy can provide much-needed funds to loved ones if you should die unexpectedly. Perhaps you and your spouse share a mortgage, or you have a child bound for college. Life insurance can help your family members keep up with those and other financial concerns.

It doesn’t, however, cover every type of death. Before you choose a policy, learn what is (and isn’t) covered in the plan.

 

 

How does life insurance work?

In exchange for premium payments, a life insurance company will pay out a lump sum “death benefit”—usually the face amount of the policy—to the beneficiaries you identify when you buy the coverage. (These can be people such as your loved ones, or entities like a charity.)

There are two general types (term, or temporary, and permanent, which won’t expire as long as the required premiums are paid) and three specific categories to choose from:

  • Term. The most common and, typically, least expensive kind of coverage, these policies last for a set period, such as 20 or 30 years. Once the term ends, the coverage usually ends (you may be able to extend coverage at a higher cost).
  • Whole life (permanent). Each premium payment helps build up cash value* in the policy. This gives you a potential source of supplemental income, while still protecting loved ones or providing a legacy in the form of the policy’s death benefit.
  • Universal life (permanent). These work like whole life policies but typically give you more cost, coverage and payment options.

Within these three main categories, you can choose among many varieties of policies. But unless you plan to name an organization—say, a charity—as beneficiary, selecting the right one for you will depend on what type of expenses your family would need to cover if you’re gone.

 

Expenses covered by life insurance

The beneficiaries of a life insurance policy can spend the money however they wish. But several expenses typically arise after a death, which life insurance funds can help cover:

  • Monthly bills and expenses. Life insurance proceeds can help cover everyday costs families face, like rent payments or groceries.
  • Co-signed debts. If you have a joint mortgage, student loan or other debt, you can help your co-signer: The death benefit could go toward repaying the loans.
  • Estate planning. Your loved ones may need to consult a lawyer to figure out next steps for handling your estate after you die. Life insurance can help cover legal fees, taxes and other associated costs that can arise when settling your estate.
  • Legacy planning. You can support causes you care about for years to come by directing life insurance funds to specific organizations.
  • Child or dependent care. For parents of young children or adult dependents, a policy can help fund the kids’ needs (no matter their ages). These costs might include full-time care, depending on your child’s condition or health.
  • College payments. Do you have children headed to—or already in—college who depend on you to help cover their tuition and other education-related costs? Life insurance can help ensure they can go to or stay in school even when you’re not around.
  • End-of-life expenses. The cost of burial or cremation, a funeral and other end-of-life expenses can easily hit five figures and burden loved ones. Life insurance can help cover those expenses, giving them the freedom to mourn and plan for life without you.

 

 

Types of death covered by insurance

Life policies usually cover most causes of death, including:

  • Natural causes
  • Accidents
  • Homicide
  • Suicide

Even so, coverage will depend on the individual insurer and policy. Many policies have a waiting period of at least a year for certain deaths. For example, if a suicide occurs in less than 24 months after a policy purchase, beneficiaries might not receive a penny. Make sure to know exactly what types of deaths your policy covers. Also look for any exemptions or limitations before you buy.

 

What’s not covered

Life insurance can help cover pretty much any expense once it’s in the hands of your beneficiaries. In some circumstances, though, the policy won’t pay out after you’re gone, leaving your beneficiaries without help:

  • Expired policies. Your policy will only pay out the death benefit if it’s active. If the policy lapses (for not paying premiums on time) or expires, your beneficiaries won’t be paid.
  • Fraud. If it turns out you lied—about anything—when you filled out your application, the insurer can cancel the policy. (The insurer will review the policy upon a death. If you pass away and the insurer discovers fraud, your beneficiaries will lose out on their benefits.)
  • Criminal activity. If you die while committing a crime, your policy won’t cover your death. If your beneficiaries committed a crime to access the money, they’ll also lose out on the funds.
  • Exclusions. Some policies will outline specific instances when coverage won’t apply. For example, they may exclude deaths that occur when engaged in a hazardous hobby like skydivin

 

Don’t leave your loved ones without a financial lifeline if you die. Use a life insurance calculator to get a baseline of how much coverage you need. Then speak with a professional about getting a policy in place.

 

* You can access cash value through policy withdrawals and/or loans. Outstanding loans and withdrawals will reduce policy cash values, and the death benefit and may have tax consequences.

 

Written by Casey Bond

Casey Bond is a personal finance writer and editor, as well as a Certified Personal Finance Counselor. Her work has appeared on HuffPost, Business Insider, Yahoo! Finance, MSN, Forbes, The Motley Fool, U.S. News & World Report, TheStreet and more.

 

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