Ben Luthi has been writing about personal finance for over a decade with the intent to help people improve their finances and lifestyle. He’s covered just about every personal finance topic under the sun for a variety of publications, including the Wall Street Journal, Fortune Recommends, Yahoo Finance, Experian, Credit Karma, NerdWallet, and many more. Ben lives near Salt Lake City with his two kids and two cats.
3+ years experience in insurance and personal finance editing
Katie uses her knowledge and expertise as a licensed property and casualty agent in Massachusetts to help readers understand the complexities of insurance shopping.
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Life insurance provides a financial safety net for loved ones after the insured person has passed away. But a life policy may not pay out a death benefit in certain circumstances. Understanding these exceptions can help you ensure that your coverage protects your loved ones.
Here’s what you need to know about how a life insurance policy works, what it does and doesn’t cover, and the types of policies available.
Life insurance: What it is, and how it works
A life insurance policy is a contract between an insurance company and a policyholder. In return for paying premiums, the insurance company will typically pay out a death benefit in a lump sum to one or more beneficiaries when you pass away to provide financial support.
The policy’s premium depends on the death benefit amount and the insured party’s age, health, and other mortality factors.
Life insurance policies may remain in force for the duration of the insured party’s life or have a set term of 10, 20, or 30 years. Forms of whole or permanent life insurance typically have a cash-value component, which accumulates over time.[1]
What does life insurance cover?
Life insurance will typically pay out a death benefit if the insured party dies due to natural causes, an accident, or a terminal illness. Policies may also cover murder and suicide in some cases.
Depending on the insurance company, it may take several days or up to a couple of months for the beneficiary to receive the death benefit.[2]
What can you use life insurance for?
Once the insurer pays out the death benefit, the beneficiary can decide how to use the proceeds. Insurers generally don’t restrict how you can use the money. If you have a life insurance payout, you may choose to focus on immediate needs, plan for the long term, or both.
Some common costs life insurance can help cover include:
Funeral and burial expenses
Medical bills
Day-to-day living expenses
Lost-income replacement
College tuition for children
Debts, such as mortgages or car loans
Inheritance of legacy for surviving children
Child or dependent care
What life insurance doesn’t cover
Like any type of insurance, life insurance policies have some exclusions. Because each insurer has its own rules, it’s crucial that you carefully review the insurance policy documents for exclusions before moving forward.
Insurance companies may not pay a death benefit in the following specific circumstances:
Death during the waiting period: If you die between when you apply for coverage and when your insurance policy becomes effective, your insurer won’t pay out to your beneficiaries.
Death by suicide: Insurance companies don’t typically pay out if the insured committed suicide during a specified initial period — often two years from the start of the insurance policy.
Application misrepresentations: The insurance company can withhold coverage if it finds one or more misrepresentations on the application.
Death due to high-risk activity: If the insured died while engaging in a high-risk activity or hobby — such as skydiving or rock climbing — not disclosed to the insurer, the company may exclude coverage.
Death due to war or terrorism: Insurers typically don’t cover death resulting from certain acts of war or terrorism.
Murder by beneficiary: If a beneficiary murders the insured, the insurance company won’t pay out.
Types of life insurance
Life insurance companies sell multiple types of life insurance products. The right one for you will depend on your situation, needs, and goals.
Here’s a quick summary of the most common options:
Term life insurance: This provides coverage for a set term, typically ranging from 10 to 30 years. A term policy is often the cheapest form of life insurance. It doesn’t provide lifetime coverage and has no cash-value component.
Whole life insurance: Whole life coverage is a form of permanent life insurance that provides lifetime insurance protection and has a cash-value component. But this coverage type is more expensive than term life.[3]
Universal life insurance: Another form of permanent life insurance, universal life offers lifetime coverage and a cash-value component. It may provide more flexibility than whole life insurance, allowing you to use some of your cash value to cover some or all of your premium payments.[4]
Guaranteed life insurance: A type of whole life coverage, guaranteed life insurance doesn’t require a medical exam. This coverage may come with a waiting period, during which the policy won’t pay out the full benefit if you pass away — though it may return premium payments to your beneficiary. It usually includes cash value.
Final expense insurance: Generally a smaller insurance policy, final expense insurance can cover certain end-of-life expenses, such as funeral arrangements, medical bills, or legal expenses. Typically, this coverage doesn’t require a medical exam.
Factors that affect the cost of life insurance
Your life insurance premium reflects your insurance company’s assessment of your risk of dying within the policy’s term, resulting in a death benefit payout.
Some factors insurance companies consider include:
Age
Older people tend to pay higher rates.
Gender
Women generally qualify for lower premiums than men because they live longer on average.
Health status
Certain diseases or health conditions can increase your rates or result in coverage denial.
Coverage limit
You’ll pay higher premiums for more coverage.
Policy type
Some types of insurance are more likely to pay out and cost more as a result.
Lifestyle factors
Insurers will account for the risks associated with smoking tobacco, drinking alcohol, or engaging in other high-risk hobbies.
How to buy life insurance
You can buy a life insurance policy online or through an insurance agent. As you consider your options, here are some steps you can take to get coverage:
Assess your financial needs and goals. Consider your financial situation and the financial needs of your loved ones in the event of your death.
Compare policy types and costs. Carefully consider the pros and cons of each type of life insurance to determine the right fit for your budget.
Get quotes from multiple insurance companies. Shop around and compare rates from several insurers to ensure you get the best deal.
Apply and undergo a medical exam if required. You’ll need to provide some basic personal information, indicate how much coverage you want, and name your beneficiaries. The exam may include answering health questions and taking a blood test.
Review the insurance policy. You’ll receive documents that include information about the insurance policy, including exclusions. Read policy documents to make sure you understand what you’re getting.
Sign it. Depending on the insurer, you may do this in person or online.
Pay the premium. Your insurance policy will be in force once you pay the first premium.
What life insurance covers FAQs
The following information can help answer your remaining questions about what life insurance covers.
How do you choose a life insurance beneficiary?
If you have a spouse, you may simply choose them as the beneficiary. But if you have older children, you may also opt to have multiple beneficiaries to include them.
Depending on your situation, it may even make sense to create a trust and name it as the beneficiary. This may be particularly worthwhile if you’re a single parent with young children.
How much does a funeral cost?
The median cost of a funeral with a viewing and burial is $8,300, while the median cost for a funeral with cremation is $6,280, according to the National Funeral Directors Association.[5] Your life insurance beneficiary receives financial support that can help cover these funeral expenses.
What does life insurance pay out for?
Life insurance typically pays out when the insured party passes away, as long as their death doesn’t fall under one of the insurance policy’s exclusions.
Can you use life insurance money for anything?
Yes. Insurers generally don’t have restrictions on how you can use life insurance proceeds. Beneficiaries can use the death benefit to cover death-related expenses and other long-term needs.
Does life insurance pay out for a normal death?
Yes. A life insurance policy will typically pay out for any death that falls within the policy’s coverage, including death from natural causes, an accident, or a terminal illness.
Ben Luthi has been writing about personal finance for over a decade with the intent to help people improve their finances and lifestyle. He’s covered just about every personal finance topic under the sun for a variety of publications, including the Wall Street Journal, Fortune Recommends, Yahoo Finance, Experian, Credit Karma, NerdWallet, and many more. Ben lives near Salt Lake City with his two kids and two cats.
3+ years experience in insurance and personal finance editing
Katie uses her knowledge and expertise as a licensed property and casualty agent in Massachusetts to help readers understand the complexities of insurance shopping.
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