Key Takeaways
- The most common expenses covered by life insurance include bills and debt, medical expenses, child care, education costs and end-of-life expenses.
- In most cases, beneficiaries can use the payouts from the life insurance policy for whatever they choose.
- Deaths that occur during the first two years of a life insurance policy usually receive extra investigative attention before the insurer pays out the death benefit.
What Expenses Can Life Insurance Cover?
Typically, the beneficiaries of a life insurance policy can use the proceeds for whatever they choose. The policyholder should account for all the expenses they would need to cover in the case of their absence. This may include everyday living expenses, bills and even your children’s future education costs.
When you buy life insurance, you should estimate how much coverage you will need to cover all your expenses. For example, if you’re the beneficiary of your spouse’s policy, then you should discuss how much insurance you would need to replace your spouse’s income should something happen.
- Bills and Debt
- Payment of ongoing expenses is a common use of life insurance proceeds; the policy amount is often intended to replace the lost income of the person who died.
- Child Care
- When someone with young children passes away, the burden on their surviving partner may grow. In this case, they may need money to pay for childcare services and after-school programs. The death benefit can help provide for such expenses.
- Education
- Another typical use of death benefits is establishing or supplementing a college fund or other educational account for young children. If one parent dies prematurely, the surviving parent may need help paying current or future education costs.
- End-of-Life Expenses
- Sometimes the beneficiary needs the payout to cover the expenses associated with the funeral and burial of the policyholder. Depending on where you live, even a simple funeral may cost thousands of dollars.
- Medical Needs
- A beneficiary may need the death benefit to help pay for the medical bills that the policyholder accumulated before passing away. Doctors, hospitals and labs often bill patients separately, and it can take months for the final bills to roll in.
Expenses Commonly Covered by Life Insurance
Life insurance is one of the most important financial decisions one can make. Unfortunately, I’ve had to help process claims for life insurance clients who have passed away. It’s a true relief to see a family, already struggling with loss, not have to struggle with any financial burdens. Life insurance proceeds do not have any rules to how the beneficiary needs to use them, which provides a lot of freedom to help wherever needed.
Eric EstevezLicensed Independent Insurance Broker and Owner of HLC Insurance Broker, LLCEric Estevez is an independently licensed life insurance agent who serves as a financial professional for a multinational corporation. Upon graduating from William Paterson University with a bachelor’s degree in accounting, Eric kickstarted his career as a financial institution auditor. His first day on the job was Sept. 15, 2008…
What Causes of Death Does Life Insurance Cover?
Life insurance typically covers natural causes of death, accidents, illnesses and forces of nature. If the death results from a crime, including homicide, the insurer must still pay the beneficiary unless the beneficiary is guilty of the criminal activity.
Different types of life insurance policies are thorough and filled with specifics about what they will — and won’t — cover when someone dies. However, most causes of death are covered in full.
Life Insurance Coverage
| Cause of Death | Is It Covered by Life Insurance? |
|---|---|
| Car or motorcycle accident | Yes |
| Illness | Yes |
| Suicide | No, unless policy is over two years old in most cases |
| Overdose | Yes |
| Murder | Yes |
| Risky behavior | Yes, but depends on the policy |
Life insurance covers almost any cause of death unless the policy’s terms explicitly state otherwise. One common exclusion noted within policy terms is suicide. Typically, a suicide exception has a time limit.
The insurer may not pay the policy benefit if the insured party dies by suicide within the first two years of the policy’s existence. This provision avoids scenarios in which a person arranges for insurance and then commits suicide to obtain the payment for their survivors.
What Does Life Insurance Not Cover?
Life insurance does not offer coverage if the provider finds fraudulent information on the application. For example, if a policyholder died of a smoking-related illness after stating they are a nonsmoker on their application, then the provider would not cover their death.
The insurance provider will often request a medical examination before authorizing the issuance of a policy and sometimes will investigate a death if they think there might be some misstatements. An investigation is common if the policyholder dies during the first two years of coverage, also known as the contestability period.
Additionally, providers will not cover any policies in which the policyholder failed to make all the premium payments. In this case, the policy would lapse, and the provider would not pay out the death benefit.
Fraud and Misrepresentation
Any misrepresentation on the application must be deemed material for the insurance company to deny the claim. Sometimes a misrepresentation is considered fraudulent, which may have additional consequences.
No matter what, pay attention to any exclusions on your policy, and be sure your beneficiary knows how to start the claims process. While the process is typically simple, the insurance provider may require multiple documents beyond the death certificate.
Join Thousands of Personal Finance Enthusiasts