It is important to understand that just because you call an agency or life insurance company to get coverage, it does not mean that what they sell you is going to cover you for all things.
That is why the question,
“What does life insurance cover?”
is actually a great question to ask the agent you are speaking to.
But you might want to be even more specific and ask,
“is the policy you are offering me going to cover me no matter how I die?”
This is especially true if you consider a variety of different “types” of insurance policies designed to achieve different goals.
This is why…
We wanted to take a moment and discuss exactly what different types of life insurance policies will cover and answer some of the most common questions we’re asked by our clients who are trying to determine which policy they should apply for.
Questions that will be addressed here in this article will include:
- What does life insurance cover?
- Types of death covered by a traditional life insurance policy?
- What doesn’t life insurance cover? Or, more specifically, when won’t a life insurance policy payout?
- How can I be sure that I’m buying the right life insurance for me?
So, let’s get to it.
What does life insurance cover?
Usually, when we’re asked the question “What does life insurance cover?” the client asking the question is either wondering…
How Can the death benefit payout be used? and
Will my life insurance payout no matter how I die?
How can the life insurance policy death benefit be used?
To better understand what kind of life insurance policy someone may need or want, one of the questions we like to ask here at IBUSA is…
“Why do you want to purchase a life insurance policy?
Is it to protect any lost wages that would occur if you died prematurely?
Are you looking to protect a spouse or a dependent child financially?
To cover the cost of a mortgage or a college education?
Or maybe you’re just looking to purchase a small burial life insurance policy to take care of your final expenses.
We ask this question…
Because how you choose to answer will usually provide us with a clue as to what “type” of life insurance policy will be the “best” for you.
That said, regardless of “why” you choose to purchase a life insurance policy when the time comes and you pass away, your beneficiaries will be free to do whatever it is that they want to do with the money.
If you chose to purchase a $250,000 life insurance policy to cover the cost of a mortgage, when you die, the $250,000 doesn’t have to be used by your family to pay for that mortgage.
Instead, they can choose to use this money any way they see fit.
“Which, in our opinion, is good news for your beneficiaries!”
What types of deaths will be covered by a life insurance policy?
Now this question can be a bit more “tricky” to answer than our previous question because not all life insurance policies will cover the same “types” of deaths, and there will be some “exclusions” that one must be aware of.
For this reason…
We’re going to want to break this question up into parts so that we can first discuss what “kinds” of death may be excluded from most (if not all) life insurance policies and then briefly discuss how different “types” of policies may have their own unique exclusions as well.
That said however…
Let’s begin our conversation by first discussing what “types” of death will be covered by most standard or traditional life insurance policies (policies that will require one to provide proof of insurability).
Natural causes of death.
Traditional life insurance policies will provide coverage to an insured if they were to die from “natural causes” while their policy is in force.
Natural causes of death would include causes of death caused by diseases such as cancer, diabetes, heart disease ect…
Accidental causes of death.
Traditional life insurance policies would also provide coverage to an insured if they were to die from “accidental causes” while their policy is in force.
Accidental causes of death would include those caused by a motor vehicle accident, a slip and fall, natural disaster, a victim of crime, etc…
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?
When won’t a life insurance policy payout?
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 policy has lapsed or expired, your policy would NOT be in force, which would mean that the insurance company that offered you your policy would no longer be responsible for paying the death benefit of your policy upon your death.
Reasons why a policy…
May have lapsed could be because:
- An insured failed to keep their payments up to date, and their “grace period” has expired.
- The agreed-upon term period of the policy has ended.
Or the insured may have decided that they no longer wished to keep their insurance policy active and intentionally stopped making payments on it (effectively canceling the policy).
#2. Misrepresentation or Fraud has been determined.
A life insurance policy is considered a binding legal agreement between two consenting parties whereby each party is entering into the agreement based on “good faith.”
Meaning that everything you agreed to and represented on your life insurance application is the truth and that everything in the policy written by the life insurance company will be honored.
Which means that…
If you “intentionally misrepresented” yourself on your life insurance application, thereby preventing the insurance company from being able to make an informed decision about whether or not they would want to insure you, this MISREPRESENTATION could be grounds for nullifying your life insurance policy.
It’s important to understand that when we talk about “intentionally misrepresenting” yourself on your life insurance application, we’re not talking about small inconsistencies or errors (like you weigh 190 when you really weigh 195).
What we’re talking about is…
If you feel you may be developing some serious illness, but you choose not to disclose this on your life insurance application.
Let’s say you went on vacation, and while overseas, you began suffering from severe chest pain.
As a result, you saw a doctor in a foreign country who told you to see your primary care physician the moment you return.
Worried about what you might discover, you decide to apply for a life insurance policy first to avoid the possibility that you may be diagnosed with some disqualifying pre-existing medical condition.
This could and probably would be considered Fraud because you are intentionally withholding information from the insurance company while applying for coverage.
May be “challenged” during the first two years of most traditional life insurance policies whereby 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 Fraud…
May include situations where someone may not actually be living where they say they are at the time of the application, or they may attempt to qualify for more coverage, then they should be able to qualify for legitimately were they completely honest on their application.
It should be noted…
Though, that not all “misrepresentations” or examples of “fraud” will be grounds for an insurance company to deny one’s claim completely. In many causes, it may only result in a reduction of one’s benefits.
This is why it’s always better to be 100% honest when applying for coverage because oftentimes, what one thinks might prevent them from being able to qualify for coverage won’t, but lying about it might!
#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 term used to describe a clause that is written into every Guaranteed Issue Life Insurance Policy, which will limit when the guaranteed issue life insurance policy will begin to cover an insured for “natural causes” of death.
This “limitation” will…
Usually mean that an insured will need to wait/live for a minimum of two years (sometimes three) before their guaranteed issue life insurance policy will begin to provide full coverage.
For these “clauses” is because unlike a traditional life insurance policy, which will require one to have to show proof of “insurability,” guaranteed issue life insurance policies won’t. \
This means that regardless of one’s current health status, they ought to be able to qualify for coverage provided that they are a US citizen, that lives in a state where these types of life insurance policies are offered and meet the minimum age requirements.
As a result…
Insurance companies that offer guaranteed issue life insurance policies will need to rely on a graded death benefit to ensure that they don’t insure those seriously ill.
#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?
Whether you realize it or not, the fact that you’re reading this article means that you’re well on your way to finding the “best” life insurance policy for you because this shows that you’re taking your time, doing your research and not simply applying for the first life insurance policy you’re being offered.
“Which is great!”
Now all you need to do is…
Find a talented life insurance agent who will listen to your needs, answer any questions you may have, and have access do dozens of different life insurance companies to choose from so that you won’t have to rely on a “One size fit’s all” approach.
The good news is…
This is exactly what you’ll find when you give IBUSA a call! So, what are you waiting for? Give us a call today, and let us show you what we can do for you!