What Does Life Insurance Cover?

Life insurance is a tool that offers financial protection for your family after your death.[1] But, as with any financial product, it’s important to understand how it works to make sure it’s the right option for you.

When you get life insurance, you agree to pay a premium—either for a set period of time, or for the rest of your life, depending on the type of policy—in exchange for a death benefit, an amount of money that is paid to your family or loved ones upon your death.[1]

Some policies also offer the option to build cash value over time. In those cases, part of your premium is set aside as though into a kind of savings account. You have the option to borrow against that money or withdraw it.[2]

Life insurance rates are based on factors like the type of policy, your lifestyle, and general health.[3] Some life insurance policies even require that you take a medical exam to qualify, and not everyone gets the go-ahead once those results are in.

“Somebody who’s had a heart attack or cancer, they would not be insurable, at least right away,” says Mark S. Gardner, president of Retire Well Dallas, a wealth management company. That’s why it’s often easier, and cheaper, to get life insurance at a younger age when your health is likely to be at its best.

There are two primary types of life insurance: Term and permanent.

With term insurance, you get coverage for a set period of time (like 15, 20 or 25 years). Because it’s limited in time, it typically costs less than what you’d find with a permanent policy. As the name suggests, permanent policies last until death (provided you pay your monthly premiums, of course.) These policies can earn cash value, as noted above, while term policies do not include that component.[2]

In general, life insurance kicks in if the policyholder dies due to an illness, accident or natural causes. There can be exceptions. Some policies may exclude any death that is ruled a suicide and which occurs two years or less from the policy start date. Or there may be exclusions for war-related deaths.

Your beneficiaries can use the money from your death benefit as they see fit, whether it go to groceries, mortgage payments or college tuition. The death benefit is also generally tax-free.[4]

When shopping for life insurance, you’ll often see the option to get add-ons, also called riders. These can offer many benefits, and depending on the rider, they may increase your coverage.

For example, there are riders for critical, chronic, and terminal illnesses, which allow you to claim part of the death benefit while you’re still alive. So if you’re willing to pay extra, you may be able to get more comprehensive coverage and benefits from a life insurance policy.[5]

If you have people in your life who depend on you financially, life insurance can be a big help. But you have to make sure you have adequate coverage. That way, those funds won’t run out before your dependents are ready.

“You need to know how much it takes for you to live on, but that doesn’t take into account inflation,” says Gardner. He suggests getting coverage that’s at least five to six times your annual income. So for someone who earns $50,000, a $250,000 to $300,000 policy could be sufficient.

You’ll also want to take special circumstances into consideration. For example, if you have kids and want to cover their education with a life insurance policy, you’d want to factor educational costs into your death benefit.

Either way, you’re almost always going to get the most coverage for the lowest price by getting coverage earlier in life.

“The actuarial statistics are in your favor,” says Gardner. “You’re paying with cheap dollars because of inflation. And if you have cash value, it grows and you can also get an extra flow of income.”

What is no-exam life insurance?

No-exam life insurance, also called guaranteed life insurance, is a policy that doesn’t require a medical exam to qualify. However, you may find that these policies offer smaller death benefits than life insurance that requires a medical exam.[6]

What things does life insurance not cover?

Life insurance may come with certain exclusions. For instance, it will always exclude coverage if someone’s policy lapses, or if they lied on their application. Deaths that are ruled a suicide may also be excluded in certain circumstances.[4]

Does life insurance cover funeral costs?

Life insurance proceeds can be used as the beneficiaries see fit, including funeral costs.