Between funeral costs and living expenses, your family could face significant financial pressure after your passing. To better prepare your loved ones for this possibility, you may want to consider purchasing a life insurance policy.
Generally speaking, life insurance provides a payment to your chosen beneficiary(ies) after your death. however, there are many different types of life insurance, so it can be difficult to determine which policy is best for you. bankrate took a detailed look at what a life insurance policy covers to help you navigate what can seem like a complicated market.
Reading: Life insurance what does it cover
what does life insurance cover?
Life insurance is a type of policy designed to provide a death benefit (a sum of money) to selected beneficiaries after your death. The main function of life insurance is to provide financial support to your loved ones after your death. The payout from a life insurance policy can be used in a variety of ways: to pay for end-of-life expenses, to pay off debt, to replace lost income, to help send kids to college, to drop off a financial gift and more.
monthly bills and expenses
One of the main uses of life insurance is to replace your income for those who depend on it. That’s why it can be helpful to work with an agent or use a life insurance calculator to determine how much coverage you need. That way, you’ll know your loved ones will be taken care of when you die.
When receiving the death benefit, the beneficiary can use the money to pay bills, including groceries, utilities and child care expenses, as well as other costs that may arise. There are no restrictions on the types of expenses you can use a death benefit payment for.
The costs of paying off debt can be tough on anyone’s budget, but paying off debts you co-signed on after losing the financial support of a loved one can be even tougher. Mortgage payments, car loan costs, and other debt can cause financial stress. receiving a death benefit can help your loved ones pay those costs without worry.
college tuition and education
If you’re financially responsible for your child’s college tuition or education, you may want to factor those costs into account when purchasing a life insurance policy. That way, if you die, you can still help your child pay for college. Adding the cost of college to your life insurance calculations could dramatically increase the amount of death benefit you need. On average, the annual cost of tuition and fees, for various institutions, is as follows:
- in-district two-year public college: $3,800
- four-year public state college: $10,740
- four-year out-of-state public college: $27,560
- four-year private non-profit college: $38,070
- Expired or Lapsed Policies: If your life insurance policy is no longer active when you die, 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. Permanent life insurance policies, such as whole life and universal life, generally do not expire, but can still expire if the premium is not paid.
- suicide: many life insurance policies contain a provision that death by suicide is not covered for the first two years. if your life ends while the rider is still in effect, your beneficiaries will not receive a payment.
- Fraud: Life insurance policies come with a contest period. this is usually a period of two years after the start date of your policy. If you die during this time and your insurer finds that you intentionally misrepresented something on your application, your beneficiaries may be denied payment.
- exclusions: Although rare, some insurance companies include exclusions that identify specific circumstances in which your beneficiary may not be eligible to receive a payment, such as if the policyholder dies as a result of a dangerous activity. exclusions most commonly apply to deaths caused by hazardous occupations or hobbies; however, there may be other exclusions stipulated in your policy. be sure to review your policy to understand your specific coverage.
How much does life insurance cover?
when does a life insurance policy pay off?
do you need life insurance if you have no dependents?
Do children need life insurance?
additional life insurance resources
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Please note that these figures are annual and do not include other expenses, such as room and board, meal plans and other costs for food, books and supplies, or transportation. Because life insurance beneficiaries can spend a payout as they see fit, building college prices into your death benefit amount could provide significant support after you’re gone.
end of life expenses
Another main function of life insurance is to pay your expenses at the end of your life. these could include the costs of your funeral, the price of a casket, and the expenses of a reception. The death benefit of any life insurance policy can be used to pay for funeral costs. however, if that’s the only coverage you need, 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 does not require a medical exam for approval. however, compared to other types of policies, final expense coverage can 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 babysitters and other expenses, life insurance policies can help cover the cost of childcare. If your beneficiary is also caring for an elderly parent or other dependent, a life insurance death benefit could also help with those costs, if you pass away.
medical expenses and long-term care
While life insurance is primarily used to provide financial support to your loved ones, sometimes you can use your policy to your advantage. life insurance with living benefits provides 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, depending on your needs. For example, many companies offer an accelerated death benefit rider, which gives you access to a portion of your death benefit before your death if you’ve been diagnosed with a terminal illness. this can help you pay for medical expenses while you’re still alive, reducing the financial burden on your loved ones after you pass away.
While this can often be a great benefit, know that using a portion of your death benefit early will effectively reduce the total amount paid to your beneficiaries after your death. Plus, living benefits are not the same as long-term care insurance, which can help protect your finances from the effects of long-term medical costs.
In addition to funeral costs, life insurance may cover the cost of estate planning after your death. Estate planning is a bit different from end-of-life expenses in that it involves getting an attorney to close any remaining accounts in your name and officially reporting your death to the county and the IRS. Many people don’t realize that descendants may still owe taxes to the IRS, and a life insurance policy can help them cover these costs so they don’t incur an unnecessary financial burden.
leave a legacy
It’s easy to see life insurance as a practical purchase. after all, you are helping your loved ones feel financially secure after your passing. but life insurance can go one 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, just make sure you buy an adequate amount of coverage. you probably still want your loved ones to be paid enough to cover living expenses, debts, and the other costs mentioned here.
what does life insurance not cover?
There are no limitations on how a beneficiary can use a life insurance death benefit payment. however, in some cases, a death benefit may not be paid, meaning the beneficiary will not receive the money after his or her death.