It is crucial to understand that just because you contact an agency or life insurance company to obtain coverage, it does not mean that what they offer you will protect you against all eventualities. That is why asking the agent, “What does life insurance cover?” is an excellent question to pose.
However, it might be beneficial to be even more specific and inquire, “Will the policy you are proposing cover me regardless of how I pass away?” This is especially important if you are considering various insurance policies that aim to achieve different objectives.
Therefore, we would like to take a moment to explain precisely what different types of life insurance policies cover and answer some of the most frequently asked questions we receive from clients who are trying to determine which policy is best suited for them.
In this article, we will address the following questions:
- What does life insurance cover?
- What types of death does a traditional life insurance policy cover?
- What doesn’t life insurance cover, or when won’t a life insurance policy pay out?
- How can I ensure that I’m purchasing the right life insurance policy for me?
Let’s dive in.
What does life insurance cover?
Life insurance is a financial safety net that pays out a tax-free lump sum of money to your beneficiaries if you were to pass away while the policy is in force. The coverage amount and the duration of the policy are determined by the policyholder and can be customized based on their needs and budget.
Life insurance typically covers death resulting from any cause, whether it be natural causes, illness, accidents, or other unexpected events. However, it is essential to review the terms and conditions of the policy before purchasing it to ensure that there are no exclusions or limitations.
Some life insurance policies may also provide coverage (optional living benefit riders) for disability, critical illness, or long-term care. Still, these additional benefits usually come at an extra cost and require additional underwriting. Therefore, it’s important to consult with an insurance professional to determine what type of coverage best suits your needs.
What types of deaths will be covered by a life insurance policy?
Answering this question can be tricky because not all life insurance policies cover the same types of deaths, and some policies have exclusions. To provide a comprehensive answer, we’ll break it down into parts. First, we’ll discuss the types of death that are generally excluded from most life insurance policies, and then we’ll touch on the unique exclusions of different policy types.
Let’s start by examining the types of death that are covered by standard or traditional life insurance policies, which typically require proof of insurability.
Natural causes of death.
In the context of life insurance, natural causes of death refer to deaths resulting from illnesses, diseases, or health conditions that occur naturally, as opposed to deaths resulting from accidents or external causes.
Examples of natural causes of death that are typically covered by life insurance include heart disease, cancer, stroke, and respiratory illness. When a policyholder dies from natural causes while their policy is in force, their beneficiaries are typically entitled to receive the death benefit specified in the policy.
Accidental causes of death.
In the context of life insurance, accidental causes of death refer to deaths resulting from unexpected events or circumstances, such as accidents, injuries, or other external causes. Examples of accidental causes of death that are typically covered by life insurance include deaths resulting from motor vehicle accidents, falls, drowning, fires, or homicides. When a policyholder dies from accidental causes while their policy is in force, their beneficiaries are typically entitled to receive the death benefit specified in the policy.
Be sure to never confuse an Accidental Death Policy with a true life insurance policy. An Accidental Death Policy WILL NEVER provide coverage for natural causes of death, which is why it’s not considered a “true” life insurance policy.
Traditional life insurance policies will typically provide coverage to an insured if they were to die by suicide.
However, most traditional life insurance policies will contain an exclusionary period in the beginning of one’s policy (typically 2 to 3 years), which will state that if an insured dies by suicide during this time, the insurance company will not be held responsible for paying out a death benefit to the beneficiary of the insured.
Traditional life insurance policies will also payout in the event that the insured is murdered, with one major exception in most states. This exception is that if the beneficiary of the murdered insured is proven to be the actual murderer.
The purpose of this exclusion (which is commonly referred to as the “slayer statute”) is to prevent a beneficiary from financially benefiting by killing an insured.
Which then begs the question…
“What other types of deaths aren’t covered?
Now that we’ve covered most of the situations where a life insurance policy “will” payout let’s now take a moment and discuss situations where an insurance company would not be required to pay on a claim.
Top 5 situations where a life insurance policy won’t pay
#1. Your policy has expired.
If your life insurance policy has lapsed or expired, the insurance company would not be responsible for paying the death benefit upon your death as your policy would no longer be in force.
There are various reasons why a policy may have lapsed, including failure to keep payments up to date and expiration of the grace period, the end of the term period agreed upon in the policy, or a deliberate decision by the insured to stop making payments on the policy, effectively canceling it.
#2. Misrepresentation or Fraud has been determined.
A life insurance policy is a binding legal agreement between two consenting parties, and each party is expected to enter into the agreement in good faith. This means that everything you represented on your life insurance application is expected to be true, and everything written in the policy by the insurance company will be honored.
If you intentionally misrepresent yourself on your life insurance application, it could be grounds for nullifying your policy. This is not to be confused with small inconsistencies or errors, but rather intentionally withholding significant information that could affect the insurer’s decision to cover you.
For example, if you suspect that you may have a serious illness but decide not to disclose this on your life insurance application, it could be considered fraud. This is because you are intentionally withholding information from the insurance company while applying for coverage.
Fraudulent activity can be challenged during the first two years of most traditional life insurance policies, and an insurance company has the right to contest any policy claim if it looks as though the insured may not have been completely honest on their life insurance application.
Examples of fraudulent activity may include misrepresenting one’s address or attempting to qualify for more coverage than one is eligible for legitimately. However, not all misrepresentations or examples of fraud will be grounds for an insurance company to deny a claim completely. In many cases, it may only result in a reduction of benefits.
It’s always better to be 100% honest when applying for coverage because what one thinks might prevent them from being able to qualify for coverage may not actually be the case, and lying about it could ultimately result in a denied claim.
#3. Criminal activity.
Almost all life insurance policies (and accidental death policies) will usually have some type of exclusion protecting the insurance company from having to pay a death benefit if the insured death was caused by his or her active participation in a crime—a crime such as a bank robbery, terrorist activity, or some other “serious” offense.
#4. Graded Death Benefit.
A graded death benefit is a clause included in every Guaranteed Issue Life Insurance Policy, which limits coverage for “natural causes” of death and delays full coverage for a minimum of two years (sometimes three). The purpose of these clauses is to mitigate risk since Guaranteed Issue Life Insurance policies do not require proof of “insurability.”
As a result, anyone who is a US citizen and meets the minimum age requirements can qualify for coverage, regardless of their health status. Insurance companies offering Guaranteed Issue policies rely on a graded death benefit to avoid insuring those with serious health conditions.
#5. Additional exclusions.
Lastly, some life insurance companies will also choose to add additional exclusions to their policies as well.
These exclusions will usually center around participation in certain activities such as skydiving, hang gliding, or piloting a private airplane, but could also include other activities as well, such as traveling to certain locations or working in certain professions along with whatever else an insurance company might find “unacceptable”.
This brings us to the last topic that we wanted to take a moment and discuss with our readers here in this article, which is…
How can I be sure that I’m buying the right life insurance for me?
Buying life insurance can be a daunting task, but there are a few things you can do to ensure that you are buying the right life insurance for you:
- Determine your needs: Consider your current financial situation, debts, and dependents. Determine how much coverage you need to ensure that your family is taken care of in the event of your death.
- Understand the types of life insurance: There are two main types of life insurance: term life insurance and permanent life insurance. Understand the differences between them and choose the one that meets your needs.
- Shop around: Get quotes from several insurance companies and compare them. Look for a policy with the coverage you need at a price you can afford.
- Read the fine print: Make sure you understand the terms and conditions of the policy. Be aware of any exclusions or limitations that may affect your coverage.
- Consult with a professional: Consider working with a licensed insurance agent or financial advisor to help you choose the right policy for your needs. They can provide guidance and answer any questions you may have.
Remember, the right life insurance policy for you will depend on your individual needs and circumstances. Take the time to do your research and choose a policy that will give you and your loved ones peace of mind.