Paul Sanchez
Life insurance is a contract between you, the policyholder, and a life insurance company. It is designed to provide financial support to your beneficiaries upon your death. This financial support is known as a death benefit and is usually paid as a tax-free lump sum. The death benefit can be used to cover a range of expenses, including funeral costs, debts, mortgage payments, income replacement, and future security. Life insurance policies typically cover most causes of death, including natural causes and accidents, but there are some exclusions, such as suicide, dangerous or illegal activities, and misrepresentation. It's important to carefully read your policy to understand what is and isn't covered.
| Characteristics | Values |
|---|---|
| Purpose | Provide financial support to beneficiaries upon the death of the insured person |
| Payout | A lump sum or regular payments to beneficiaries |
| Use of Payout | Cover funeral costs, debts, mortgage payments, income replacement, future security, medical bills, education, loans, day-to-day costs, savings, etc. |
| Policy Types | Term life insurance, whole life insurance, universal life insurance, final expense insurance, accidental death and dismemberment (AD&D) policies, graded death benefit policies |
| Riders | Critical illness coverage, disability rider, accidental death benefit, waiver of premium, accelerated death benefit rider, chronic illness death benefit rider, long-term care rider, guaranteed insurability |
| Common Exclusions | Suicide within the first two years, acts of war and terrorism, dangerous or illegal activities, substance abuse, misrepresentation on the application |
What You'll Learn
Natural causes
There are two main types of life insurance: term life insurance and whole life insurance. Term life insurance is temporary coverage for a set period, such as 10, 20, or 30 years. Whole life insurance offers coverage for your entire life and can also include a cash value benefit while you're alive. This benefit grows as you pay premiums, and you can borrow against it through a loan.
It's important to note that life insurance policies have common exclusions. For example, suicide within the first two years of a policy is typically not covered. Additionally, risky activities or occupations may be excluded, and life insurance can also be denied if someone dies while taking part in illegal activity.
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Accidents
Accident insurance typically works by submitting a claim when a covered event happens. A claims professional then reviews the claim, and if approved, a payment is sent directly to the policyholder to use as they see fit. Accident insurance can be especially beneficial for individuals who lead an active lifestyle that may increase the risk of accidents and for those who don't receive paid time off, sick days, or workers' compensation, as they would not earn a paycheck while out of work due to an accident.
Accidental death is also covered by life insurance policies, offering additional coverage if death is due to an accident specified in the policy. Life insurance policies typically cover accidental deaths resulting from car accidents and drowning. Accidental death and dismemberment (AD&D) policies are more affordable but only cover deaths resulting from accidents, excluding natural causes. They may also provide benefits for serious injuries like loss of limbs or eyesight.
Accident insurance and accidental death coverage under life insurance policies provide financial protection and peace of mind in the event of an accident, helping individuals and their families cope with the financial burden of unexpected expenses.
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Suicide
However, after the suicide exclusion period has ended, life insurance policies generally do cover suicide and will pay out the death benefit as long as no other terms of the policy have been violated. This means that if the policy has been in effect for more than two years and all other conditions are met, suicide is usually covered. It's important to carefully read the terms of your specific policy to understand its coverage regarding suicide.
It's also worth noting that group life insurance, such as that provided through an employer or organisation, or military life insurance, may treat suicide differently. These types of policies often do not include a suicide clause, so they can pay out for suicidal death. Nonetheless, it's important to review the specifics of any plan, as they can vary.
If you or someone you know is struggling with mental health issues or having suicidal thoughts, it's crucial to seek help. Resources like the Suicide & Crisis Lifeline (988 in the US) are available to provide support and assistance.
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Murder
Life insurance covers most causes of death, including murder, with a few exceptions. If you are murdered, your beneficiaries will receive a payout from your life insurance policy, unless they are found to have had any involvement in your death. This is called the "Slayer Rule", which exists to prevent beneficiaries from benefiting from the death of the policyholder.
If your beneficiary is found guilty of your murder, they will not receive a payout, even if the death is ruled as manslaughter or the result of self-defence. This rule also applies if your beneficiary hires someone else to murder you, or if they are found to have participated in a plot to kill you.
In the case of your murder, the life insurance company will wait for the police investigation to be completed and for your beneficiary or beneficiaries to be exonerated before paying out death benefits. This process can take months or even years. If your beneficiary is found to have had any involvement in your death, the insurance company will pay out to your contingent beneficiaries or to your estate.
If you are murdered while involved in criminal activity, your beneficiaries' claims may be denied. This includes minor infractions of the law, such as trespassing, driving the wrong way down a one-way street, or being under the influence of illicit drugs.
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End-of-life costs
End-of-life care, also known as palliative care or hospice care, is a type of healthcare that provides support and comfort to individuals nearing the end of their lives. It aims to enhance the quality of life for both the patient and their families by addressing their physical, emotional, and spiritual needs. End-of-life care expenses can be substantial, often reaching tens of thousands of dollars, and may include palliative care, hospice care, and funeral costs.
Palliative Care
Palliative care is a precursor to hospice care and focuses on managing symptoms and pain caused by severe illnesses or chronic conditions. It can be costly, and while health insurance may cover some treatments, there are often significant out-of-pocket expenses, including deductibles and copays.
Hospice Care
Hospice care is provided when an individual has a life expectancy of six months or less, and it includes pain management, symptom control, and spiritual support. This care can take place at home or in an inpatient centre, with costs ranging from $150 per day for at-home care to $500 for inpatient care. While some hospice care costs may be covered by Medicare, room and board, treatments aimed at curing the disease, emergency visits, and ambulance rides are typically not covered.
Funeral Costs
Funeral costs can add a significant financial burden, with the average funeral costing between $7,000 and $12,000. These costs include transportation of remains, embalming, facility rental, service transportation, printing, and caskets or cremation containers. The choice between burial and cremation can significantly impact expenses, with burials typically costing over $10,000 and cremations around $6,000.
Using Life Insurance for End-of-Life Costs
Life insurance can help with end-of-life costs, depending on the type of policy. Term life insurance provides coverage for a specific term, while whole life insurance offers indefinite coverage and a cash value component. Final expense insurance, a type of whole life insurance, is specifically designed to cover medical bills and funeral expenses, making it a popular choice among seniors.
When using life insurance to plan for end-of-life costs, individuals should consider their specific needs and preferences, document their end-of-life wishes, and choose an appropriate insurance policy to ensure their final expenses are covered.
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Frequently asked questions
Life insurance covers most causes of death, with some exceptions. Natural causes, accidents, suicide after a certain period, and murder are usually covered.
Life insurance can help cover essential day-to-day expenses, end-of-life costs, debts, childcare, and funeral costs.
Life insurance typically does not cover suicide within the first two years of the policy, death due to illegal activities, and death resulting from war or terrorism.
Life insurance is a contract between the policyholder and the insurance company. The policyholder makes regular premium payments, and the company provides a death benefit to beneficiaries upon the insured's death.
The two main types are term insurance, which provides coverage for a specified period, and permanent insurance, which offers lifetime coverage. Other types include whole life, universal life, and guaranteed issue policies.
