Life insurance serves as a crucial financial safeguard, providing individuals with a safety net against life’s many uncertainties. Depending on your policy type and any elective add-ons, life insurance can guarantee a payout – also known as the death benefit – to beneficiaries upon the policyholder’s passing, or can provide regular payouts in the event of a critical illness that prevents your regularly scheduled work from happening, and therefore stops your regular income payments.
Understanding exactly what life insurance covers is pivotal for those wishing to make well-informed decisions about their financial future. In this article, we will be looking at:
- What life insurance covers
- Coverage exclusions and limitations of various policies
- The difference between term or whole-life coverage
- How to choose the right coverage for you
Let’s ensure that you’re armed with the knowledge you need to choose the right policy that will safeguard your loved one’s financial well-being in times of need.
Topics
Understanding Life Insurance Coverage
As we’ve mentioned previously, the primary purpose of life insurance coverage is to provide financial security to loved ones and dependents in the event of the policyholder’s passing, offering something of a financial safety net during challenging times.
In most life insurance policies, you will come across these three core terminologies:
- Death benefit – this is the amount of money that the insurance company will pay out to beneficiaries upon the policyholder’s death. It is typically a tax-free lump sum and serves as the main financial protection as provided by the policy
- Beneficiaries – beneficiaries are the individuals who are designated to receive the death benefit upon the policyholder’s passing. They play a crucial role in ensuring that the policy’s proceeds are used for the intended financial needs, such as covering expenses, debts, or providing for dependents after the passing of the policyholder
- Premiums – premiums are the regular payments policyholders make to the insurance company to maintain their coverage, which can vary based on factors like age, health, coverage amount and policy type. These payments ensure that the policy remains active and that the death benefit is available when needed, and are usually paid on a monthly or sometimes an annual basis
Now that we’ve got to grips with some of the key terms, let’s look into what life insurance policies typically cover.
What Life Insurance Typically Covers
While all life insurance policies are different, in most cases, life insurance will typically provide a standard coverage to include a lump sum death benefit to beneficiaries upon the policyholder’s passing. Some different policies can provide regular pay-outs to those with critical illnesses who are prevented from working as usual, or can provide a single payout to complete mortgage repayments.
Life insurance policies generally cover death by any cause, whether it’s due to illness, accidents or natural causes. This broad coverage ensures that loved ones receive the intended financial protection, offering peace of mind and financial security in a variety of circumstances.
It’s important to note that if the death is by other means, such as the policyholder taking their own life, the payout may not be as imagined as this can breach the terms of the policy. It’s good to check the terms and conditions thoroughly to be aware of any exclusions in your individual plan.
The financial circumstances that the death payout can include – but are not limited to – the following:
- Replacing lost income – in the event that the primary earner of the household has passed, the policy’s death benefit can replace lost income to ensure that the surviving family members can maintain their standard of living, taking care of bills and other charges
- Debt payments – beneficiaries can use the death benefit to settle outstanding debts like mortgages, loans or credit card balances to help prevent financial burdens during already challenging times
- Funeral and end-of-life expenses – funerals and end-of-life expenses can be costly, and at times unexpected if the individual hasn’t suffered a long-term illness. Life insurance can help to cover these expenses so that there is no financial strain when the time comes
- Children’s education – the death benefit can be allocated to fund your children’s education to ensure continuity of education in the event of your passing
- Living expenses – day-to-day expenses such as groceries, utilities and childcare can continue to be covered by the benefit to provide stability for the family during a difficult transition
The death benefit is versatile in nature and can be used to cover a wide range of expenses upon the policyholder’s passing.
Coverage Exclusions, Limitations and Additional Options
As with any insurance policy, there are likely to be exclusions and limitations that may prevent the full payout from being actualised. These limitations can cover a range of reasons, but some of the most common ones to be aware of are as follows:
- Death by suicide within the initial period – many policies will have a suicide exclusion within the initial period, which is usually around two years, but can sometimes be one year. If the policyholder takes their own life during this time, the death benefit may not be paid out
- Misrepresentation or non-disclosure of medical issues – policies may contain provisions that allow the insurer to deny a claim if the policyholder provided false or incomplete information on the application. This can include medical issues, for example, proving the importance of honesty in the application process
In addition to the standard level of cover provided by the policy, you can also choose to add on certain other benefits depending on your own financial needs. These can include:
- Critical illness coverage – this add-on can provide a payout if the policyholder is diagnosed with a critical illness during the policy term. These funds can then be used to cover medical expenses, seek specialised treatment, or make necessary lifestyle adjustments
- Accidental death and dismemberment (AD&D) – AD&D coverage pays out an additional benefit if the policyholder’s death is the result of an accident, or if they suffer specific injuries or disabilities due to an accident that wasn’t their fault
- Disability income – this add-on can offer ongoing income replacement if the policyholder becomes disabled and is unable to work to ensure financial stability during a period of incapacity
In all cases, if you are unsure about the level of protection you need, speak to a financial advisor who will be able to tell you the ins and outs of each add-on or exclusion to ensure you’re fully informed when it comes to signing your contract.
The Differences Between Term and Whole Life Insurance Coverage
Term life insurance and whole life insurance are two distinct types of life insurance policies, each offering unique coverage. Let’s take a closer look at their individual makeup to help you understand which might be the best choice for you.
Term life insurance provides coverage for a specified term, such as 10, 20 or 30 years. This means that if the policyholder passes away during the given term, the beneficiaries will receive the death benefit payout.
This type of life insurance offers straightforward, temporary protection, making it an affordable choice for short-term financial needs, such as paying off a mortgage or ensuring income replacement for dependents, especially valuable if the policyholder was the main breadwinner for the family.
It’s important to note that with term life insurance, if the policyholder outlives the coverage period, they will no longer be covered, and will need to take out a new policy in order to receive the same benefits. This is possible by renewal, but premiums may be increased due to the increase in age, and thus the perceived risk to the insurer.
On the other hand, whole life insurance offers coverage for the entire lifetime of the policyholder, which includes a cash value component that grows over time. This policy type provides lifelong security and serves as both insurance and an investment, making it a good choice for long-term financial planning.
The main difference between the policies is the distinction between term and whole life. Term insurance is a temporary solution, while whole life offers permanent financial protection.
Factors That Can Affect Your Coverage
There is no one-size-fits-all when it comes to life insurance – there are a number of factors that can affect your policy coverage. Let’s take a look at some of the top contenders:
- Age – as you’d expect, younger individuals typically pay lower premiums as they present lower mortality risks than older applicants. It’s common to see that premiums increase with age
- Health status – similarly, policyholders in good health will often be met with more affordable rates, while those with pre-existing medical conditions may see higher premiums. This links back to the higher mortality rate as already mentioned in the age category
- Lifestyle – smoking, high-risk sporting activities or some hazardous professions can increase premiums due to the elevated risk involved, again increasing the mortality rate and perceived risk to the insurer
- Policy type – the coverage amount and policy type (such as term or whole life) will also impact your costs. It’s typical to see that whole life insurance is more expensive than term life insurance as the payout period is indefinite, rather than in a fixed period
Providing accurate information during the application process is essential for obtaining the right coverage at the best possible rates – misrepresentation or non-disclosure of health or lifestyle information can result in a policy being voided or claims being denied. Honesty during the underwriting process ensures fair and appropriate rates, safeguarding both your interests and the financial security of your loved ones.
How To Choose the Right Coverage For You
Selecting the right coverage amount for your life insurance policy requires careful consideration, and it isn’t something that should be rushed.
It’s important that you first assess your financial needs – this can include evaluating your outstanding debts, such as mortgages, loans, and credit card balances, as well as calculating your family’s living expenses. You should also consider any future financial goals, like funding your children’s education or providing for your spouse’s retirement, as these will all feed into your policy needs and requirements.
Make sure to determine how much income your family would need in the event of your absence to maintain their standard of living. It’s a good idea to multiply your annual income by the number of years your family will depend on this income to get a rough idea of the numbers.
It’s also important that you make sure to ensure that your policy’s coverage amount is sufficient to pay off any debts, including the mortgage if it is still being paid off so that your loved ones aren’t burdened with financial liabilities after your passing.
For other factors that may influence your policy choice, you should consider the number of dependents in your family – as you’d expect, larger families may require more substantial coverage than smaller ones.
Similarly, different life stages, such as starting a family, buying a home, or nearing retirement, come with different financial needs that can help to define your choice. You should also consider whether or not you want to leave a financial legacy behind or provide for specific financial goals, like your children’s education or any charitable contributions.
Lastly, you should ensure that your chosen coverage amount aligns with your budget, as premiums should be affordable and sustainable for your current lifestyle. In all instances, make sure you speak to a financial advisor who will be able to talk you through all the policies in detail to find one that’s suitable for you and your needs.
Final Notes
While it’s perhaps not pleasant to think about, life insurance can offer you and your family valuable peace of mind. By securing a life insurance policy, you’re ensuring that your loved ones are shielded from financial hardships during challenging times.
Before signing any contract, be sure that you have thoroughly researched your options, weighing up different types of life insurance, to find a policy that’s right for you. This can include optional add-ons suitable for your own circumstances, ensuring a stable future for those you leave behind.