Just like other types of insurance, life insurance is a way to prepare for the unexpected. Talking about end-of-life plans and death might feel uncomfortable, but knowing that loved ones will have financial security in the event of a death can also give confidence.
Life insurance can generally be characterized as premiums paid by a policyholder in exchange for death benefits or cash value guaranteed by an insurance company. This financial support is allocated as a tax-free lump sum or in monthly installments to a policyholder’s chosen family members or beneficiaries.
There are several types of life insurance policies available, and they differ in cost and scope. You’re probably asking What does life insurance cover, exactly?
Before delving into the details and shopping around for policies, it might be helpful to brush up on life insurance basics and what protections are offered. To get started, this guide will break down the most common expenses covered by life insurance and highlight potential exceptions.
When someone dies, their debts don’t always do the same. Life insurance can help cover debt-related expenses.
Everyone’s financial situation is different, but household debt is common among families of all ages in the United States.
Younger families in the age range of 35-44 traditionally have the most debt, with an average of $93,700. However, 49.8% of people 75 and older still have outstanding debt, averaging out to $20,600.
If the deceased was a co-signer or joint account holder for a mortgage, credit card, private loan, or other financing, surviving co-signers may still be liable for paying outstanding debt.
Whether or not the departed was the primary earner in the family, this could still create financial hardship in the wake of an already difficult loss.
Still, unpaid debts that loved ones are not directly responsible for might affect them financially. For instance, debt payments could be deducted from the deceased’s estate, which would reduce the inheritance left to family members and other beneficiaries.
As part of a family or household, you might pay for monthly expenses, such as groceries, utilities, rent, mortgage payments, and other non-discretionary spending. These costs don’t disappear after someone dies, so payouts from life insurance can help beneficiaries stay afloat and maintain their quality of life.
A simple way to calculate the total cost for necessities is the 50/30/20 rule. Using this model, 50% of income should go toward essentials like food and housing, whereas discretionary spending and saving account for 30% and 20%, respectively.
This budget breakdown may be challenging to achieve for many households. A National Low Income Housing Coalition study revealed that roughly 10.7 million Americans put 50% or more of their income toward housing.
Replacement of Lost Income
If a policyholder is still in the workforce, lost income may be covered for beneficiaries by life insurance.
To do so, the insurance company estimates the insured’s expected future earnings, known as the human life value. This calculation incorporates several income-based and financial variables, including after-tax earnings, personal expenses, remaining years of work until retirement, and projected salary growth and inflation.
In some cases, spouses and children are eligible for employer-sponsored benefits, too, such as health care. When a family breadwinner dies, these benefits might disappear along with the income.
Accounting for lost income and associated benefits in a life insurance policy can help provide a long-term financial safety net for family members.
Child Care or Dependent Care
For households with children and other dependent family members, the loss of a parent could bring about costs in addition to lost income. Here are some related scenarios that could be covered by a life insurance plan.
If a stay-at-home parent dies, the surviving spouse might have to start paying for child care to continue working. Similarly, the loss of a working parent could require a former stay-at-home parent to enter the workforce and secure child care while doing so.
This can be a serious financial burden, as single-parent families spend 36% of household income for center-based child care on average.
Surviving spouses or beneficiaries may become responsible for caring for other family members, too.
Aging parents who were previously cared for by the deceased may now require the services of a home care worker or need to be moved to an assisted living facility. Also, special-needs children may need care during and beyond the lifetime of parents.
An illness or injury that results in death could involve hospital bills, medication, and other expenses even if the deceased has health insurance.
Likewise, long-term care and nursing home facilities are not traditionally covered by health insurance, while Medicaid may only apply based on income eligibility.
Twenty-six states and Puerto Rico have filial responsibility laws, which, if enforced, can obligate adult children to cover their parents’ or relatives’ medical care and nursing home expenses in certain cases.
Choosing a life insurance policy that includes additional coverage, known as a rider, for long-term care or related medical expenses is one way to help spare loved ones from bearing such costs.
This may require a separate fee on top of the insurance premium, but the option to receive accelerated payments before death or reimbursements for medical care afterward could be advantageous.
If you have children or are planning to have children, the projected cost of college tuition is an expense that can be eligible for life insurance coverage.
That’s good news, considering the high cost of higher education in the United States. For the 2020-2021 academic year, in-state public university tuition, which is generally the cheapest option, is $9,687 on average, according to U.S. News & World Report.
Students living on campus or studying away from home will have housing and other living expenses as well.
Life insurance can permit policyholders to name multiple beneficiaries. In addition to choosing family members and loved ones, some people may designate a charity as a beneficiary.
The flexibility can also extend to setting what percentage of death benefits and inheritance is allocated to each beneficiary. A policyholder could grant 40% apiece to two children and 20% to a nonprofit organization.
Although charitable contributions can carry tax benefits, it is worth noting that insurance payments can’t be written off on the grounds that a nonprofit is a designated beneficiary.
Amid grief and getting the deceased’s affairs in order, loved ones could be faced with the immediate cost of a funeral and burial or cremation.
According to the National Funeral Directors Association, the median funeral in 2019 cost $7,640. That included funeral home fees, embalming, and a casket.
In some cases, there may be fees if a will for the decedent’s estate does not exist. Drafting a will, no matter one’s financial situation, can help assuage these concerns.
Thankfully, these end-of-life expenses can be covered by life insurance. For beneficiaries, starting the claims process right away can help them get the funding needed in a timely manner.
Generally, this begins by informing the insurance company of the death and sending a copy of the death certificate.
What Types of Death Are Covered?
At this point, you can feel confident answering What does life insurance cover?
In addition to providing guidelines for what death benefits may be used for, insurance policies stipulate what types of death are covered.
Every policy is different, but the following are normally covered, with a few caveats.
Dying of old age, cancer, or a heart attack are some leading examples of causes. To safeguard that life insurance coverage comes through, the policy will likely need to be active until death.
The pricing of life insurance premiums varies with the desired coverage and an individual’s health.
Therefore, insurance companies may include a clause that allows them to deny paying out benefits if they think the policyholder provided false or misleading health information (e.g., lying about not smoking).
Unintended deaths from injuries or a drug overdose can qualify for life insurance coverage. One possible exception is if an accident occurs while the insured individual is committing a felony.
If a policyholder’s death is ruled a suicide, the death will most likely qualify for life insurance payouts. The one caveat is that life insurance companies may include a clause exempting payment if the policyholder commits suicide during the first two years the insurance is in effect.
Insurance companies may choose to exclude certain types of death from coverage based on risky behavior or professions that include dangerous activities, such as flying a private plane or professional drag racing.
Considering Life Insurance Options?
Death is one of life’s only certainties. Planning well ahead can help secure the financial support that family members will need.
SoFi® has teamed up with Ladder, where getting a quote online for life insurance takes a mere couple of minutes. As life changes, you can adjust your coverage with the click of a button.
Ladder policies are issued in New York by Allianz Life Insurance Company of New York, New York, NY (Policy form # MN-26) and in all other states and DC by Allianz Life Insurance Company of North America, Minneapolis, MN (Policy form # ICC20P-AZ100 and # P-AZ100). Only Allianz Life Insurance Company of New York is authorized to offer life insurance in the state of New York. Coverage and pricing is subject to eligibility and underwriting criteria. SoFi Agency and its affiliates do not guarantee the services of any insurance company. The California license number for SoFi Agency is 0L13077 and for Ladder is OK22568. Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other. Social Finance, Inc. (SoFi) and Social Finance Life Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderLifeTM policies. SoFi is compensated by Ladder for each issued term life policy. SoFi offers customers the opportunity to reach Ladder Insurance Services, LLC to obtain information about estate planning documents such as wills. Social Finance, Inc. (“SoFi”) will be paid a marketing fee by Ladder when customers make a purchase through this link. All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.
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