What does life insurance cover – and what doesn’t it cover?

The basic concept of life insurance is simple. It’s an agreement between you and an insurance company where you agree to pay premiums and if you die, the company agrees to pay a lump sum of cash called a death benefit to your beneficiaries.

Of course, there’s more to it than that. Some policies – called term life insurance – provide protection for a limited number of years, then your coverage stops. Other policies – permanent life insurance – last a lifetime1. And while every life insurance policy covers your life with a death benefit, different types of life insurance policies can cover other needs as well: 

  • Some life insurance policies (such as whole life or universal life insurance) have a cash value component2 that can help protect and build your finances.
  • Life insurance can often include other types of protection, such as disability insurance to protect a portion of your income if you’re unable to work.
  • Many life insurance policies have valuable “riders” or optional provisions that can provide benefits before death3.
  • Since death benefit payouts are generally income tax free, some permanent life policies can be used to help transfer money to heirs with fewer tax liabilities4.

Life insurance pays a benefit for almost all deaths caused by illness, accidents, or natural causes

Health insurance companies may not cover certain types of treatment, but other than the caveats noted below, it’s rare for a life insurance company to deny paying a claim on any standard term life or permanent life insurance policy that is paid up and active, no matter how the policyholder died: 

  • Illness and natural causes: As long as the life insurance policy is in force, your beneficiaries will receive a death benefit payout whether you die from disease, cancer, a heart attack, or old age. Caveat: If you have a pre-existing condition, it might be excluded as a condition of getting coverage; however, this will be clearly spelled out at the time you purchase your policy.
  • Accidental death: Your beneficiaries will get a death benefit if you die in any kind of accident, whether at work, home, or on the road. Even accidental drug overdoses are typically covered. Caveat: One very limited type of life insurance – accidental death and dismemberment (AD&D) – only pays a benefit in case of an accident; however, nothing is paid if you die from disease or natural causes.
  • Suicide: Death by suicide is normally covered. Caveat: Life insurance policies typically include a clause stating that for the first two years the insurance company won’t pay a claim on any death that is ruled a suicide. If you or someone you know is struggling with depression, suicidal thoughts, or may be at risk, please contact the National Suicide Prevention Lifeline at 800-273-8255. 

What is not covered by life insurance? 

Other than the exceptions noted above, there are some common-sense circumstances in which the insurance companies will not pay a death benefit. The most common reason for denying payment: an expired policy. Term life insurance lasts for a specific period of time – typically between 10 and 30 years. After that, the policy lapses and there’s no coverage, so of course any claim is denied. While a permanent (whole life insurance or universal life insurance) policy is designed to last a lifetime, it can and will lapse after a grace period if premiums aren’t paid. (However, it’s important to note that unlike a term policy, permanent policies have cash value that may be used to help pay premiums, keeping the policy in force.) Other reasons for denying a life insurance claim include:

Fraud and misrepresentations

Any lies or misrepresentations on your application can have serious consequences, and life policies have a contestability period that typically lasts two years after the policy goes into effect. If you die within that timeframe, the insurance policy will review your application for misrepresentations. If anything is found, such as a pre-existing condition that was not mentioned on the application and led to death, the benefit paid to your beneficiaries can be reduced or denied altogether.

Exclusions

Life insurance policies may exclude military or other deaths caused by an act of war. However, deaths caused by acts of terrorism are usually covered, although you should look at the specific wording of your policy to be sure. If the insurance company knows you participate in a hazardous activity such as scuba diving or piloting small aircraft, death from that cause might be excluded from your policy. These types of exclusions are somewhat rare, however – it’s more likely that the insurance company will write the policy and charge higher premiums to account for the added risk or refuse to issue a policy altogether. 

What can you use life insurance for?

Life insurance death benefit payouts are given to beneficiaries with no strings attached – they can use the money for any purpose they see fit. Nevertheless, before you buy a policy you should think about what you want it to be used for, because that can help determine the amount of coverage and whether you should get term life insurance, whole life insurance, universal life insurance, or another type of life insurance: 

Living expenses and support

The benefits of life insurance start with protection for your family’s financial wellbeing if you pass away. Even if you’re not the primary income earner, any income you contribute helps pay for the rent or mortgage, monthly utilities, groceries, and the like. Life insurance death benefits can be used to pay all these expenses, helping to ensure your family can maintain their lifestyle.

Mortgage payments

A mortgage is typically the largest monthly expense in a household, and you probably don’t want to subject your family to the prospect of having to move as they are mourning your death. While you may have included the mortgage along with other living expenses, sometimes it makes sense to differentiate between the two. For one thing, your family will always need groceries, but your mortgage payments might be ending in a few years. Or, you could have co-signed for a child or other family member and want to protect them from default if you aren’t around. Accordingly, separate policies are available just to cover mortgage debt.

Debts

If you die, your spouse or co-signer will be responsible for any debts you have. So make sure to account for all credit card, auto, student, and business loans as you think about what your policy should cover. You should also know that you can name more than one beneficiary, so for example if you want to leave a part of the death benefit to a partner to pay off a co-signed business loan, you can.

Child or dependent care

Even if you have children, you may not have high childcare expenses if your spouse is a stay-at-home parent. However, if he or she goes back to work after you pass away, those costs can rise. Conversely, if you’re the stay-at-home parent you should have coverage even if you’re not currently earning a salary: it could cost thousands each month to replace the childcare and domestic services that you provide. You should also account for the needs of aging parents or other family members that depend on you for support.

Education expenses

A college education costs continue to rise. A life insurance policy is one way to help ensure your children can access the educational opportunities you want them to have.

Final expenses

If you’re older and don’t want to burden family members with unexpected funeral costs– modest final expense policies are available to cover that amount. These policies are typically easy to qualify for – you may not need a medical test and may just have to answer a few simple health questions on your application.  

Assuring business continuity

All or part of your policy's proceeds can be left to a family-run business to help ensure continuity of operations after you’re gone. If you own a business with other partners, the payout can be used to help fund a buyout of your share of the business, with the proceeds going to your heirs.

Leaving a legacy 

Life insurance can be used to help ensure your adult children – and their children – lead the life you want for them. Life insurance proceeds can be used to fund a family trust that can disburse money according to your wishes for education or any other purpose.

Supporting a charitable cause or institution

A beneficiary doesn’t have to be a person. All or part of your death benefit can go to your alma mater, a charity you care about, or a church.

While you’re still living: wealth building

Permanent life insurance policies have a cash value component that grows tax-advantaged over time. You can borrow money against it, use it to help pay your premiums, or even surrender it for cash to live on in retirement5.

How do I get a policy that covers what I need?

After you’ve decided what you want life insurance to cover, you can start thinking about how big a policy you may need. If you’re the main income earner and want to leave enough to support your family, you can start estimating your coverage amount using one of these general rules: 

1. Consider Multiplying your income by 10.

This is one of the simplest rules of thumb. While this way of estimating can provide your family with a useful cushion, it doesn’t actually take into account your true expenses and needs. That leads us to the next formula, which is just a bit more complex.

2. Consider Multiplying your income by 10 – and add college for each child.

This approach is almost as easy to figure out as the first rule, but it gives you the added comfort of knowing you can help your children have the education you want for them.

3. Consider the DIME formula.

DIME stands for Debt, Income, Mortgage, and Education –four big factors to consider when making a more detailed estimate of your life insurance needs. Total your debts, mortgage, and college expenses, plus your salary for the number of years your family needs protection (e.g., until the children are out of the house), and that may be the amount of coverage to consider.

4. Human Life Value

Some financial representatives calculate the amount you need using the Human Life Value philosophy, which is your lifetime income potential: what you’re earning now, and what you expect to earn in the future.2

In its simplest form, the philosophy suggests that you multiply your income by a variable based on factors such as age, occupation, projected working years, and current benefits.

As with every individual, the amount of recommended insurance you purchase depends on many factors. A simple way to get that number, however, is to multiply your salary times 30 if you are between the ages of 18 and 40. The calculation changes based on your age group, so please refer to the chart:

 AGE

INSURANCE AMOUNT

18-40

30 times income

41-50

20 times income

51-60

15 times income

61-65

10 times income

66-70

1 times net worth

71-75

1/2 times net worth


The more factors you consider, and the more specific your calculations, the more comprehensive your coverage can be. But remember these general rules are just that – generalities that are not specific to you. If you want a policy for one of the more specialized purposes above, such as taking care of dependent parents or business continuity, you should start by sitting with your financial professional to calculate what coverage amount may meet your needs. 

Term life insurance? Whole life insurance? Universal life insurance?

The amount you need and things you want to cover also affect the kind of policy you get. There are two basic types of life insurance: Term and permanent. A term life insurance policy provides coverage for a specific period of time, typically between 10 and 30 years. It is sometimes called “pure life insurance” because unlike whole life insurance, there’s no cash value component to the policy – once the term is over, the coverage ends.

Permanent life insurance provides coverage that lasts your entire life. There are two main types of permanent insurance: whole life insurance and universal life insurance. Unlike term, these policies are not “pure life insurance” products because in addition to the death benefit, they include a cash value component. A portion of your premium dollars can grow tax-deferred over time – but the entire death benefit is immediately payable to your beneficiaries from the first day you have the policy.

Term life policies are typically less expensive than permanent policies, and that can make a large death benefit more affordable. In fact, term life coverage may be less costly than you think: A 30-year old male who doesn’t smoke can get a 20-year term life policy with $2,000,000 of coverage for just $122 a month. If you’re wondering what you might pay, go to the Guardian term life insurance calculator to get an instant quote.

However, term life doesn’t work for every coverage purpose. For example, it can’t help you build cash value, and may not help you leave a legacy, because the term may expire before you do. That’s where permanent life insurance comes in: whole life insurance and universal life insurance are more flexible tools that can help build and protect family wealth over the course of your entire life. As we noted, there are also more specialized kinds of policies for final expenses, mortgage protection, and accidental death. And keep in mind that you can also have more than one kind of life insurance policy for different coverage purposes.

This might be a good time to talk with someone who can help 

Now that you know a little more about what life insurance covers and how it can help your family, it’s time to take the next step. Talk with an experienced professional who will take the time to learn about your unique situation, listen to your coverage concerns, and patiently explain the different term life, whole life, and universal life options that may fit your needs and your budget. If you don’t know a financial professional, ask your friends for a recommendation – or contact Guardian to find a representative who can help. But no matter what you want to cover, don’t put off making it happen: the younger you are, the less you will typically pay for life insurance. 

Term life insurance calculator 

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Frequently asked questions about life insurance coverage

What types of death are covered by life insurance?

Term life, whole life, and universal life insurance policies pay a benefit for almost all deaths caused by illness, accidents, or natural causes. Suicide is also (typically) covered, as long as the suicide doesn’t occur in the first two years of coverage. If you or someone you know is struggling with depression, suicidal thoughts, or may be at risk, please contact the National Suicide Prevention Lifeline at 800-273-8255

What is not covered by life insurance?

A life insurance company may not pay a benefit (or only pay a reduced benefit) if there was any kind of fraud or misrepresentation in the policy application, particularly regarding issues that affect your health. Finally, there may be exclusions written into the policy for certain kinds of risky behaviors or hobbies, such as scuba diving or flying small planes.

How does life insurance work if you don't die?

That depends on the type of policy you have. A term life policy only lasts for a limited term or period of time, typically between 10 and 30 years. If you don’t die in that timeframe, the policy lapses at the end of the term and your coverage ends. A whole life or universal life policy works differently and builds tax-advantaged cash value over time. That cash value can be used in a number of ways while you are still alive: you can borrow against it, use it to help pay your premiums, or even surrender the policy for money to live on in retirement.

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Disclaimer

1 The Journal of the American Academy of Psychiatry and the Law Expanding Slayer Statues to Elder Abuse http://jaapl.org/content/43/3/369 Last accessed July 2020.

2  All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

3 Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors. Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.

4 Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

5 Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

6 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

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