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 have some financial security in the event of a death can also provide peace of mind.
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? Let’s take a look at the most common expenses covered by life insurance as well as potential exceptions.
Debts
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. According to 2022 data from the credit bureau Experian, families in the age range of 42-57 have the most debt, with an average of $154,658. However, people 77 and older still have outstanding debt, averaging out to $39,345.
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 off 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.
In fact, even if they’re not directly responsible, loved ones might still be financially impacted by unpaid debts. For instance, debt payments could be deducted from the deceased’s estate, which would reduce the inheritance left to family members and other beneficiaries.
Monthly Bills
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 2023 National Low Income Housing Coalition study revealed that roughly 11.3 million Americans put 50% or more of their income toward housing.
Replacement of Lost Income
If a policy owner was still in the workforce at the time of their death, their beneficiaries may be able to recover lost income through 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 certain employer-sponsored benefits, too, such as health insurance. 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 usher in additional costs as well as 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.
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.
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Medical Expenses
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. Note that 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.
Education
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 2022-2023 academic year, in-state public university tuition, which is generally the cheapest option, is $10,950 on average, according to the College Board’s annual “Trends in College Pricing” report.
Students living on campus or studying away from home will have housing and other living expenses as well.
Charitable Contributions
Life insurance can permit policy owners 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.
End-of-Life Expenses
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 2021 cost $7,848. 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 different types of 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.
Recommended: The Difference Between Will and Estate Planning
What Types of Death Are Covered?
At this point, you can feel confident answering the question, 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.
Natural Causes
Old age, cancer, and heart attack are some common causes of a natural death. To ensure 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).
Accidents
Unintended death 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.
Suicides
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.
Possible Exceptions
Insurance companies may choose to exclude certain types of death from coverage based on risky behavior or professions that involve dangerous activities, such as flying a private plane or professional drag racing.
The Takeaway
Life insurance is a way to help protect your loved ones from the financial impact of your death. There are several types of policies available, and they differ in cost and scope. However, they typically cover certain things, including debt-related expenses, monthly bills, replacement of lost income, child care expenses, medical expenses, charitable contributions, education, and end-of-life expenses.
If you’re shopping for life insurance, SoFi has partnered with Ladder to offer competitive term life insurance policies that are quick to set up and easy to understand. You can apply in just minutes and get an instant decision. As your circumstances change, you can easily change or cancel your policy with no fees and no hassles.
Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
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