Life insurance infographic

What Does Life Insurance Cover And Is It Worth It? [Plus 6 Common Plans]

Life insurance isn’t exactly a warm and fuzzy topic. Nobody really wants to think about the final expenses of their life, like their funeral costs and how much money their family will need once they are gone. 

But the truth is, a comprehensive life insurance policy can help ease your mind. There are several different life insurance policies out there. We will explain their differences and answer a few common questions to help you make an informed decision to protect your family’s future. Keep reading to learn more about the question, what does life insurance cover and if you need it.

What is Life Insurance?

Life insurance is a form of insurance that provides financial benefits to the policyholder’s beneficiaries in the event of the policyholder’s death. The policyholder pays premiums to the insurance company, and, in return, the insurance company agrees to pay a specified amount to the beneficiaries upon the policyholder’s death, also known as a death benefit.

What Life Insurance Covers 

Life insurance can cover a wide range of expenses and financial needs, depending on the specific policy. Some everyday expenses that life insurance can cover include burial and funeral expenses, outstanding debts, and ongoing expenses like a mortgage, childcare, college tuition or other educational costs. Life insurance can also cover general living expenses, like groceries, utilities, internet and other bills.

What Life Insurance Doesn’t Cover 

Life insurance does not typically cover certain types of deaths, such as suicide or death resulting from a pre-existing medical condition. It also generally does not cover expenses related to the policyholder’s own long-term care.

How to Obtain Life Insurance 

To get life insurance, you will need to contact a life insurance company or agent and apply for a policy. The process usually involves filling out an application, providing information about your age, health, and other personal details, and undergoing a medical exam if required. The insurance company will then review your application and decide whether to offer you a policy and, if so, at what premium rate.

Once you have been approved for a policy, you will need to pay the premiums as specified in the policy terms. The amount of the premiums and the frequency of payments will vary depending on the type of policy and the amount of coverage you choose.

It’s important to carefully consider your life insurance needs and shop around to compare policies and premiums from different insurers before making a decision. A financial advisor or insurance agent can help you to determine the right amount and type of coverage for your situation.

Employment Offerings

Many employers offer life insurance as a benefit to their employees. Employer-provided life insurance is often referred to as group life insurance.

Group life insurance is a specific type of life insurance policy that covers a group of people, typically employees of a company or members of an organization. The employer typically pays for the policy, and the employees are automatically enrolled in the policy unless they choose to opt out.

Group life insurance policies can provide a convenient and affordable way for employees to get life insurance coverage. The premium payments are often lower than those for individual policies, and the coverage may be portable, meaning that employees can take the policy with them if they leave the company.

It’s important to note that group life insurance policies may provide less coverage than individual policies, and the coverage may not be as flexible. If you are considering getting life insurance through your employer, it’s a good idea to carefully review the policy terms and compare them to those of individual policies to determine the best option for your needs.

What is the Cost of Life Insurance? 

Like most insurance policies, the price varies depending on factors such as the policyholder’s age, health, and lifestyle. In general, younger policyholders and those who are in good health will pay lower premiums. 

The death benefit amount also affects the cost of the policy, with larger death benefits typically resulting in higher premiums. It’s best to speak with a life insurance agent to get an idea of the cost of a policy based on your specific circumstances.

Types of Life Insurance Plans

infographic of insurance policy with a family to answer the question, what does life insurance cover

There are several options when it comes to life insurance policies. Here are more details about them to understand the different life insurance options to pick the right one for you and your family.

Term Life Insurance

Term life insurance offers coverage for a specified period of time, such as ten, twenty or thirty years. If the insured person dies during the policy term, the beneficiaries will receive the death benefit. Term life insurance doesn’t build cash value, and premiums typically increase as the policyholder gets older.

Whole Life Insurance

Whole life insurance offers lifelong coverage if the premiums are paid. In addition to the death benefit, these policies also build cash value over time, which the policyholder can borrow against or withdraw. Premiums for whole life insurance tend to be higher than those for term life insurance, but they remain the same throughout the life of the policy.

Universal Life Insurance

Universal life insurance combines the death benefit protection of term life insurance with the cash value accumulation of whole life insurance. Premiums and death benefits can be adjusted, and the policyholder can choose how much of their premium goes towards the death benefit and how much goes toward the cash value.

Variable Life Insurance

Variable life insurance is sometimes referred to as permanent life insurance. It allows the policyholder to invest their cash value into investment options, like stocks, bonds, and/or mutual funds. The cash value and death benefit of this type of life insurance policy can fluctuate based on the performance of the underlying investments.

Variable Universal Life Insurance

Variable universal life insurance is very similar to variable life insurance but offers more flexibility regarding premiums and death benefits. Policyholders can adjust their premiums and death benefit amounts based on their changing needs and financial circumstances.

Survivor Life Insurance

Survivor life insurance, also known as second-to-die life insurance, provides a death benefit that is paid out upon the death of the second policyholder. This type of life insurance is often used by married couples to provide financial protection for their children or other beneficiaries.

Does Everyone Need Life Insurance?

It is not necessary for everyone to have life insurance. Whether or not a person needs life insurance depends on their individual circumstances and financial situation. If a person does not have any financial dependents, such as children or a spouse who relies on their income, then they may not need life insurance. In this case, the person’s estate and assets can be used to cover any expenses and debts after their death.

Do Children Need Life Insurance?

It is not typically necessary for children to have life insurance. This is because children do not typically have significant financial dependents, and the cost of a life insurance policy for a child would generally be greater than any potential benefit. However, some parents may choose to purchase a small life insurance policy for their child as part of their overall estate planning strategy.

This can provide a death benefit that can be used to help cover funeral and other expenses, as well as provide a source of funds for any future financial needs the child may have. 

When Do Life Insurance Policies Pay Out? ​​

Life insurance policies generally pay out a death benefit to the policy’s beneficiaries when the insured person dies. The exact terms of the payout, including when and how the death benefit is paid, will depend on the policy’s specific terms. 

In some cases, the death benefit may be paid out immediately upon the death of the insured person, while in other cases, there may be a waiting period before the beneficiaries are eligible to receive the death benefit. It is important for policyholders to carefully review the terms of their life insurance policy to understand when and how the death benefit will be paid.

The Top 10 Reasons to get a Life Insurance Plan 

  1. Life insurance can provide financial security for your loved ones after you pass. This can help them maintain their living standard and continue to pay for necessary expenses, such as a mortgage or childcare costs. 
  2. Life insurance may be used to help pay off outstanding debts and expenses. This can include things like a mortgage, credit card bills, medical bills, and other financial obligations.
  3. Funeral and burial costs can be expensive, and life insurance can help to cover these expenses. This can provide peace of mind for your loved ones and ensure that your final wishes are fulfilled.
  4. If you have children, life insurance can help cover education costs to help them get a license or degree. 
  5. If you have a spouse or other dependents who rely on your income, life insurance can provide them with financial support in the event of your death. This can help them to maintain their standard of living and cover necessary expenses without rushing out to get a job. 
  6. Life insurance can be used to create an inheritance for your beneficiaries. This can help to ensure that your assets are distributed according to your wishes and can provide a financial cushion for your loved ones.
  7. If you want to support a trust or charitable organization, life insurance can be an effective way to do so. You can designate the organization as a beneficiary of your policy, and the proceeds can be used to fund their work.
  8. If you own a business, a life insurance policy can help protect it from the financial impact of losing a key partner or employee. This can provide stability and continuity for the business and help ensure its continued success.
  9. Life insurance can be used to provide long-term care for yourself or a loved one. This can include things like in-home care, assisted living, or nursing home expenses.
  10. Depending on your life insurance policy type, there may be potential tax benefits. For example, life insurance proceeds are generally tax-free to the beneficiary, and the premiums you pay may be tax-deductible. Always consult with a financial advisor or tax professional to determine whether your policy offers any tax benefits.

What Does Life Insurance Cover – FAQs

We’re going to answer some of the most common questions about life insurance. 

Do I need life insurance?

Whether or not a person needs life insurance depends on their individual circumstances and financial situation. If a person has financial dependents, such as a spouse or children, who rely on their income, then they may need life insurance to cover funeral costs and provide for their loved ones after they pass.

How much life insurance do I need?

The amount of life insurance a person needs depends on several factors, including income, debts, and financial obligations. A financial advisor or insurance agent can help a person determine the amount of life insurance coverage they need to protect their loved ones adequately.

How do I choose a life insurance policy?

When deciding which life insurance policy is right for you, it’s important to consider the type of policy, the death benefit amount, the premiums, and any additional features or benefits the policy offers. 

Policyholders should also carefully review the terms and conditions of the policy before making a decision.

How do I determine the beneficiaries of my life insurance policy?

The beneficiaries of a life insurance policy are the individuals or entities who will receive the death benefit in the event of the policyholder’s death. The policyholder can choose their beneficiaries when they take out the policy and can change the beneficiaries at any time by contacting the insurer and completing the necessary paperwork.

Can I change the beneficiaries on my life insurance policy?

Yes, a policyholder can change the beneficiaries on their life insurance policy at any time. However, they will need to contact the insurer and complete the necessary paperwork to make the change.

Can I cancel my life insurance policy?

Yes, a policyholder can cancel their life insurance policy at any time. However, they may not receive a refund of any premiums they have already paid, and they will no longer have coverage under the policy.

Can I borrow against my life insurance policy?

In some cases, policyholders may be able to borrow against their life insurance policy. This is known as a policy loan. Policy loans can be a convenient way for policyholders to access funds, but they should be used with caution, as they can lower the death benefit and cash value of the policy.

What happens to my life insurance policy if I change jobs or retire?

If a policyholder changes jobs or retires, their life insurance coverage may be affected. Many employers offer group life insurance as a benefit, and if the policyholder leaves their job, they may lose their group coverage. In this case, the policyholder may need to purchase an individual life insurance policy to maintain their coverage.

Are there any tax implications for life insurance?

Life insurance death benefits are typically paid to beneficiaries tax-deferred or free of federal income tax. However, there may be state taxes or other tax implications for life insurance, depending on the specific circumstances. Policyholders should consult a tax advisor for more information.

Are term life insurance and permanent life insurance the same?

No. Term life insurance provides coverage for a specified time period. Ie. 10, 20, or 30 years. Permanent life insurance, which includes whole life and universal life insurance, offers lifelong coverage as long as the premiums are paid. Term life insurance is generally less expensive than permanent life insurance, but it does not build cash value.

What is the difference between universal life insurance and whole life insurance?

Whole life insurance offers lifelong coverage and a cash value component that accumulates over time. Universal life insurance also provides lifelong coverage and a cash value component, but it offers more flexibility in terms of premiums and death benefits.

Can I apply for life insurance if I have a pre-existing condition?

Yes, technically, you can get life insurance if you have a pre-existing medical condition. However, your premiums may be higher than those for someone who is in good health, and you may need to undergo medical underwriting to determine your eligibility for coverage.

Leaving a Legacy

Planning for your family members once you are gone is never easy. But by settling up a life insurance plan, you can ensure your end-of-life expenses are taken care of, and your family can have some cushion for many years while they figure out how to manage their new normal.

You might also be interested in: How to Calculate Your Life Insurance Needs

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