What Does Life Insurance Cover?

Life Insurance Coverage
Some of the links in this post are from our sponsors. We provide you with accurate, reliable information. Read our Advertising Disclosure.

Life insurance is a valuable investment, but many people misunderstand what it can do. Types of policies, what they cost, how to get them, and what the coverage includes are a few things people question when it comes to life insurance.

Life insurance is a type of policy that gives your loved ones money in the event of your death. Your beneficiaries will likely use the returns to cover funeral costs, debts, and other bills left by the deceased.

Many components go into the cost of life insurance. This article will clearly define what life insurance is, discuss the price and what the policy includes, and hopefully clear up some common misconceptions about the topic.

What is Life Insurance?

Life insurance is a way to ensure that loved ones are financially taken care of in the event of your death. When you acquire a life insurance policy, you choose a plan with a specific value, and that value will go to your beneficiaries if you pass away. 

When a person dies within their life insurance policy limits, the family gets a death benefit. A death benefit is a lump sum of cash. In most cases, it is not taxable by the IRS.  

In its truest sense, a death benefit exists to take the place of the deceased's income. What a family decides to do with that money is up to them, but most people put the money (or a good portion of it) toward funeral expenses and other end-of-life costs like hospice care and medical bills.

Death benefits can also help pay for debts and other bills left by the deceased.

Types of Life Insurance

When determining what type of life insurance coverage is best for you, it is essential to know your options. There are two basic life insurance policies: term life and whole life coverage.

Let's unpack each of these.

Term Life

Term life insurance is a policy that is bound for a specific amount of time. In other words, if an individual purchases term life insurance, they set a predetermined term for their coverage.

If the policyholder dies within the period, their family receives the death benefit. Most terms are 10, 15, 20, or 30 years.  The policyholder pays monthly fees for the entirety of the term.

Once the term expires, the policy also expires.  Due to its simplicity and affordability, term life insurance is the most popular type of policy.

According to the stats from 2019, 71% of individuals with life insurance policies had term life insurance.

Whole Life

Whole life insurance (sometimes known as permanent life insurance) is a policy that never expires. Unlike term life insurance, it lasts a person’s entire life.

This coverage is considered a more traditional type of policy.  In addition to monthly premiums, whole life insurance policyholders can choose to deposit extra funds into a type of cash reserve.

This reserve can earn interest over time. If desired, the insured can withdraw funds from this portion of the account. The investment component is a big draw for many people with this type of policy since your money will only grow over time. 

Life Insurance Cost

The cost of life insurance is dependent on several variables. Monthly premiums are determined by policy type, company, and personal variables with the insured. 

Most policies first consider age, gender, and whether or not an individual is a smoker. Yes, tobacco use does mean higher rates. Sometimes rates also change depending on overall health and chronic illness.

Most life insurance companies require a basic physical exam before coverage premiums are determined, but a few do not need an exam. 

Term life insurance is generally less expensive than whole life. Whole life coverage rates vary significantly from person-to-person and company-to-company, but monthly premiums are typically 5 to 15 times more costly than term life. 

Because whole-life policies vary significantly for each individual, it isn't easy to estimate the cost. Most life insurance companies offer free quotes if you're interested in this type of policy.

You just have to input a bit of your information into an online calculator.  Term life average costs are a bit easier to estimate on the whole.

For 2022, the average monthly price of a $500,000 policy for a 40-year-old non-smoker is $50 a month. For a smoker, that same policy averages $179 per month.

Here is a table that gives a full breakdown of these statistics.

What Life Insurance Does Not Cover

Life insurance policies will provide full coverage for natural and accidental death. Death by suicide, criminal activity, or a risky hobby (like skydiving, bungee jumping, hang gliding, etc.) may or may not be covered by your insurance policy. 

Concerning suicide, most policies will cover it, but only if you’ve had your policy for a while. Usually, if you commit suicide more than two years after getting your life insurance policy, the company will cover you.

However, these clauses are different in each life insurance policy, so make sure you know the conditions of your policy.

Insurance companies will not pay death benefits on behalf of individuals who have committed insurance fraud or have expired policies.

Common Misconceptions

  • Life insurance is too expensive. According to a 2022 study, "44% of Millennials overestimate the cost of term life insurance by 5x." Imagine thinking a policy that's only $50 per month would cost you $250 per month. That's a huge difference!
  • Life insurance isn't something I need to worry about until I'm older. For both life insurance policies, premiums are more expensive the older you are. Locking in a rate when you are young and healthy is the cheaper way to go. 
  • The process of getting life insurance is too complicated. Finding the right coverage for you can take minutes. Most companies even offer free quotes online. You only need to input some basic information and have a budget in mind.

Perhaps if more people had a better understanding of life insurance, more people would have coverage.

Summary

Too often, death presents a financial burden for the families of the deceased. Life insurance is a simple yet effective measure to eliminate the possibility of that burden.

If you wish to secure the financial well-being of loved ones in the event of your death, then life insurance is for you. It’s well worth the investment, and it can make passing away more tolerable for your loved ones.

Policy Genius

A completely automated investing tools thats perfect for beginners and hands-off style investors they used advanced strategies to earn a higher investment return than you could on your own.

Policygenius icon

You may also like