Life Cover Insurance: What You Need To Know

Life insurance is a legally binding contract between an individual and an insurance company. The individual, or policyholder, makes regular premium payments to the insurance company, which, in turn, provides the policyholder's beneficiaries with a death benefit or payout when the policyholder passes away. This death benefit can be used to cover a range of expenses, including end-of-life costs, debts, and essential day-to-day purchases. While term life insurance applies for a certain period, permanent life insurance offers indefinite coverage and a cash value component.

What is covered by life insurance?

Life insurance is a legally binding contract between you and your insurance company. It covers most causes of death, with some exceptions, and provides a financial safety net for your loved ones.

Life insurance policies cover almost all deaths, with some exclusions. As long as your policy is active when you die, life insurance providers will pay out if your death is caused by:

• Natural causes: For example, a heart attack, old age, or illnesses.
• An accident: Including accidental overdose from a prescribed medication.
• Suicide: As long as it occurs after the policy’s two-year suicide clause period ends.
• Homicide: Unless the beneficiary played a role in the murder.
• War or terrorism: In most cases, although some insurers do include exclusions for these causes of death.

Your beneficiaries can spend the policy's death benefit however they want. They can use the payout to cover:

• Everyday expenses: Including monthly bills, groceries, and other household essentials.
• Outstanding debts: Including a mortgage, credit card debt, private student loans, or auto loans.
• Childcare: Replacing care provided by a spouse.
• End-of-life expenses: Paying for end-of-life medical care and funeral expenses.
• College costs: Funding college tuition fees for children or a spouse's education.

Some policies have add-ons called riders that allow you to withdraw part of the death benefit while you're alive. You need to have a qualifying condition, such as a terminal illness or a disability, and the money can only go towards related medical costs.

Who can benefit from life insurance?

Life insurance is a legally binding contract between an insurance company and a policyholder. It provides financial protection for your loved ones after you pass away. It can also provide "living benefits" that help while you're still alive.

• Parents with minor children: If a parent dies, life insurance can ensure their children will have the financial resources they need until they can support themselves.
• Parents with special-needs adult children: For children who require lifelong care and will never be self-sufficient, life insurance can ensure their needs will be met after their parents pass away.
• Adults who own property together: If the death of one adult would mean that the other could no longer afford loan payments, upkeep, and taxes on the property, life insurance can provide financial support.
• Seniors who want to leave money to adult children who provide their care: Life insurance can help reimburse the adult child's costs when the parent passes away.
• Young adults whose parents incurred private student loan debt or co-signed a loan for them: A young adult might want life insurance to pay off their debts if they pass away before their parents.
• Children or young adults who want to lock in low rates: Life insurance rates increase with age, so it can be beneficial to get a policy while young and healthy to lock in lower premiums.
• Stay-at-home spouses: Stay-at-home spouses contribute significant economic value through their work in the home, and life insurance can provide financial protection for their family if something happens to them.
• Wealthy families who expect to owe estate taxes: Life insurance can provide funds to cover estate taxes, preserving the full value of the estate for heirs.
• Families who can't afford burial and funeral expenses: A small life insurance policy can help cover the costs of honouring a loved one's passing.
• Businesses with key employees: If the death of a crucial employee would create severe financial hardship for a business, the company may have an insurable interest that allows them to purchase a key person life insurance policy on that employee.

What are the different types of life insurance?

Life insurance is a legally binding contract between you and your insurance company. It allows your beneficiaries to claim a financial payout, often equal to your coverage amount, after your death. This payout is called a death benefit and can be used to cover funeral costs, mortgage payments, education expenses, or anything else.

There are five main types of life insurance: term life insurance, whole life insurance, universal life insurance, variable life insurance, and final expense life insurance. Each type varies based on coverage length, complexity, coverage amount, cash value, and other features.

Term life insurance is the most affordable option and only lasts for a set number of years (typically between 10 and 30). Your beneficiaries only receive a payout if you pass away during the policy's term. Whole life insurance, on the other hand, is a type of permanent life insurance that provides coverage for your entire lifetime, as long as you keep paying the premiums. It also includes a savings component that grows over time.

Universal life insurance is another type of permanent life insurance that provides coverage for your entire life, as long as you pay the premiums. It is sometimes called adjustable life insurance because it offers more flexibility than whole life insurance. For example, universal life policies allow you to increase or decrease your death benefit and even adjust or skip your monthly premium within certain limits.

Variable life insurance is a riskier type of permanent life insurance. It is tied to investment accounts, and the cash value rises and falls based on your payments and the performance of your selected investments. The greater range of investment options means it could provide a greater benefit to your beneficiaries when you pass away, but it also comes with higher risk, fees, and costs.

Final expense life insurance, also known as funeral or burial insurance, is a type of whole life insurance with a smaller and more affordable death benefit. It is designed to cover end-of-life expenses such as funeral costs, medical bills, or outstanding debt. This type of policy is easier for older or less healthy individuals to qualify for.

In addition to these main types, there are also alternative forms of life insurance, such as simplified issue life insurance, which doesn't require a medical exam, and guaranteed life insurance, which asks no medical questions and cannot turn down your application.

How much does life insurance cost?

Life insurance is a legally binding contract between you and your insurance company. It allows your beneficiaries to claim a financial payout, often equal to your coverage amount, after your death. The cost of life insurance varies from person to person and depends on several factors.

The average cost of life insurance is $26 a month for a 40-year-old buying a 20-year, $500,000 term life policy. However, life insurance rates can vary dramatically among applicants, insurers, and policy types. The younger and healthier you are, the cheaper your premiums are likely to be.

Two of the biggest factors influencing life insurance rates are age and sex, both of which are uncontrollable. Generally, younger people pay less than older people as they are less likely to have health problems. Men tend to pay more than women of the same age and health because they have shorter lifespans and are more likely to have dangerous jobs or lifestyles, making them riskier to insure.

The type of life insurance policy also affects the cost. Term life insurance is the least expensive as it lasts for a set number of years and does not build cash value. Permanent life insurance, on the other hand, typically lasts a lifetime and includes a cash value component, making it more costly than term life insurance.

Other factors that can impact the cost of life insurance include:

• Health: Insurers consider height, weight, and medical history, especially any chronic or serious illnesses.
• Tobacco use: Smokers typically pay higher rates due to the associated health risks.
• Hobbies: High-risk hobbies, such as skydiving or racing, may result in higher premiums.
• Criminal history: A criminal record may affect rates or even disqualify you from coverage.
• Occupation: Risky jobs, like police officers or firefighters, often incur higher life insurance rates.
• Financial history: Bankruptcies or other risk factors in your credit report may impact your rate.
• Coverage amount: The more coverage you select, the higher your life insurance rate will be.

While life insurance costs can vary, it is generally more affordable than people expect. For example, the average cost of a term life insurance premium is around $160 a year, much lower than the $1,000 a year that most people surveyed guessed.

How does life insurance payout?

Life insurance is a legally binding contract between you and your insurance company. It is a way to provide financial support for your loved ones after you die. When you open a policy, you will pay a regular premium – often monthly or annually – in exchange for coverage. As long as your policy is active when you die, the insurance company will pay out a lump sum, also known as a death benefit, to the policy beneficiaries.

The death benefit is typically paid out as a lump sum, though some policies may offer other options like instalment payments or an annuity. The payout can be used by the beneficiaries to cover funeral costs, mortgage payments, education expenses, or anything else.

There are three main ways in which a life insurance payout can be distributed, depending on the insurer: in the form of a lump sum, via a life insurance annuity, or through a retained asset account.

Lump Sum

A lump sum disperses your full portion of the death benefit tax-free via a check or directly into your bank account. If your payout is larger than $250,000, you might consider splitting the deposit between multiple accounts.

Life Insurance Annuity

A life insurance annuity provides a steady income stream to the beneficiary. The insurer pays out the death benefit regularly over a set timeframe while keeping the remaining amount in an account that earns interest until it's fully paid out. This life insurance payout option isn't always available, and interest earned on the remaining death benefit may be subject to taxation.

Retained Asset Account

Some insurers can hold on to your life insurance payout in a retained asset account, allowing you to withdraw funds as needed. The account operates much like a checking account – you can withdraw your balance at any time, and it's interest-bearing. Any interest earned may be subject to taxation, but the original insurance payout remains tax-free.

The payout process begins when the beneficiary notifies the insurer. The insurer will review the claim, and as long as everything is in order, the payout will be processed. The beneficiary must contact the insurance company as soon as possible after the insured's death to file a claim. They will need to file a certified copy of the death certificate and any other necessary documentation to initiate the payout process.

Frequently asked questions