What does a life insurance policy cover?
Life insurance policies pay out upon the death of the insured and cover most types of death. Some policies do have clauses or waiting periods for some types of death, most notably suicide. Others may have a general waiting period before they’ll cover any type of death; this is most common with guaranteed issue life insurance.
The life insurance death benefit itself can be used to cover just about anything, and if you expect to leave behind financial obligations, you need life insurance.
"Often, it is used to pay off bills you may leave behind or take care of expenses for your children. It is a critical part of planning for what happens to your family if you die," says Lacrecia Cade, president of Atlanta Life Insurance.
How much does life insurance cover?
A life insurance policy will cover the amount that’s listed as the death benefit, which the policy owner chose when buying the coverage.
To make sure you have enough coverage for your beneficiaries, it’s important to carefully consider how much life insurance you need before you buy the policy.
Consider current and future financial needs and any alternatives to life insurance you have available, like savings and investments.
What doesn't life insurance cover
There are a few common situations where life insurance might not cover your death:
- Death due to a high-risk hobby that was not disclosed on the application
- Death due to a pre-existing condition that was not disclosed on the application
- Death that happens while participating in criminal activity
- Suicide if it occurs within the contestability period (usually the first two years of the policy's effective date)
- Fraudulent claims or misrepresentation on the application
- The policy has lapsed due to unpaid premiums or, in the case of term life, has expired
- Death during any waiting period imposed by the policy terms
Once the policy has paid out, however, there are no restrictions on what the beneficiary can use the money to pay for. If you wish to ensure that the benefit goes to minor children and isn’t spent in the meantime by the named beneficiary, you will need to set up a trust.
