Understanding What’s Covered and What’s Not Covered with Life Insurance

How Life Insurance Can Be Used

Life insurance can be an estate planning tool, an investment vehicle, or simply a way to replace lost income in case of unexpected death. Some people purchase life insurance to establish an inheritance for their children or as a strategy to donate to a favorite charity.

Unlike other types of insurance coverage, there are no restrictions on how death benefits can be used. Life insurance beneficiaries are free to use the money as they see fit. Many people invest in life insurance to replace the income they provide for their families, so their financial needs are met, including:

• Funeral, burial, and end-of-life expenses
• Personal debts (loans, credit card bills)
• Mortgage payments
• College tuition
• Daily expenses, such as food, gas, clothing

If you have a permanent life insurance policy that builds cash value, you may be able to use it to cover expenses while you are still alive. For example, you could borrow against it to cover the down payment on a home or your child’s college tuition. Borrowing against the cash value could reduce the amount of the death benefit.

What Is Not Covered by Life Insurance

Although life insurance covers most causes of death, certain circumstances can prevent beneficiaries from receiving death benefits. The two most common reasons why life insurance claims are denied are:

• Lapse in payment: When you purchase life insurance, you are covered only as long as you continue to pay your premiums.
• Misrepresentation of the policyholder’s health: If a policyholder omits or misrepresents health information, the insurance company may deny the claim, particularly if death occurred within a two-year window after the policy was purchased.

Most life insurance policies include a suicide clause, which voids coverage if the policyholder dies by suicide within a specified time after purchasing the policy. Insures are likely to deny a claim for death by homicide if the beneficiary was involved in or responsible for the policyholder’s death. Some companies would deny a life insurance claim if the policyholder died while engaging in a high-risk activity such as sky diving.

Different Types of Life Insurance

The best type of life insurance for you will depend on your financial situation, your reason for buying a policy, and your investment goals. The basic types of life insurance are:

• Term: This type of policy lasts for a specified time period, typically 10, 20, or 30 years. During the term, you make fixed premium payments for a guaranteed death benefit. Coverage terminates at the end of the term. Some insurers will allow policyholders to extend their coverage or convert to permanent life insurance.
• Permanent: As long as you pay your premiums, coverage with a permanent life insurance policy continues for your entire life. In addition, permanent life insurance can accumulate cash value. It is more expensive than term life insurance.

If you are considering life insurance, contact our knowledgeable agents. We can get you the best quote for the coverage you need.