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The main purpose of life insurance is to replace your income when you die. Your policy pays a lump sum to your beneficiaries, who can then use the money however they like. But your insurer might deny the death benefit in certain cases — like fraud and criminal activity.
While your beneficiaries are free to spend the money on anything they want, most people put the death benefit toward these major expenses.
Many homeowners take out a policy equal to the value of their mortgage. For example, if you have a $250,000 mortgage, you might consider buying at least a $250,000 policy. That way, if you die prematurely, your family can use the cash to make mortgage repayments.
The payout also gives your loved ones the time and space to decide what to do next — whether that’s staying in the house, downsizing or moving closer to family.
On a similar note, a life insurance policy can give your loved ones the cash they need to make timely rent payments.
Between utility bills, groceries and cleaning supplies, running a household is expensive. You might also have additional costs like school tuition, extracurricular fees and health and car insurance.
A life insurance policy can cover those everyday expenses and ensure your family can maintain the lifestyle they’ve grown accustomed to, thanks to you. If you’re the sole breadwinner, it can also ease the financial burden on your loved ones so they can focus on grieving.
Are beneficiaries responsible for debts left by the deceased? The answer is no — but unfortunately, your debt doesn’t die with you.
If you have cosigned debt — like a mortgage, credit card or private student loan — and die before paying them off, those debts are transferred to your cosigner. To prevent that from happening, you could purchase a life insurance policy to take care of those outstanding balances.
Even if you don’t have a cosigner, a policy is useful to help your loved ones pay loans that are linked to their livelihood, such as a car loan. Plus, it protects their credit scores from any damage caused by late or delinquent payments.
The unexpected death of a loved one can put an immense financial strain on families. The average cost of a funeral across the US is $6,410, and your spouse, parents or siblings need the resources to pay for that within a few days of your death. To spare your family from figuring out how to come up with that money while they’re grieving, consider buying a life insurance policy.
The payout could help cover funeral and burial costs, as well as any other end-of-life expenses — like unpaid medical bills.
If you want to set aside money purely for those purposes, consider taking out a final expense policy. Also known as burial insurance, these policies are marketed to seniors and specifically designed to cover end-of-life costs.
Most policies offer an accelerated death benefit rider for an extra fee. If you’re diagnosed with a terminal illness, the rider allows you to access a portion of your death benefit to pay for any medical and living expenses.
Do you have young children? Chances are, you might be paying for pre-K, daycare, after-school programs, summer camps and even nannies or babysitters. These services don’t come cheap, and if you’re the breadwinner, your spouse or partner would be saddled with those costs if you die.
The death benefit from life insurance can help pay for child care and protect your family’s way of life. It can also step in to pay for expenses associated with raising a special needs child, such as a wheelchair, nursing care or other specialized equipment. A life insurance policy can bridge the gap where your health insurance falls short.
The same goes for aging parents. If you currently care for your parents or pay for a nursing home or medical expenses, a policy can step in to cover those costs if you pass away.
If you’re a parent or plan to have children in the future, consider the costs of higher education. To safeguard your family’s future, you could take out a life insurance policy to cover college tuition later down the line.
If you pass away, your coverage will kick in to help your children pay for their schooling and graduate with little to no student debt.
Stay-at-home parents often perform a lot of unpaid labor, such as cooking, cleaning and chauffeuring the kids around. If they die, the working parent would need to take over those household duties or hire people to help. A life insurance policy can pay enough to keep the household running smoothly.
If your estate is worth $11.58 million — the IRS threshold for 2020 — or more, it will be subject to federal estate taxes — and your heirs will have nine months to pay the tax after your death. Depending on where you live, they may have to pay state estate taxes, too.
For this reason, many high net worth individuals take out life insurance to help their families cover estate taxes. It can also help to prevent them from selling off non-liquid assets — like property — in order to pay the estate taxes on time.
In most cases, life insurance policies cover these types of deaths:
If the insurer is suspicious about the circumstances surrounding the death, it has the right to investigate the claim. This could delay the payout to the beneficiaries.
Your life insurance company typically won’t pay out your policy in these situations.
The first two years your policy is in force is known as the “contestability period.” If you die during this period, your insurer can review your application. If they discover that you lied or withheld information, they can reduce the death benefit — or deny it altogether.
The lie doesn’t have to relate to the claim, either. Let’s say you die in a car accident, and your insurer finds out you failed to disclose a past drug problem. Even if you’re completely sober at the time of your death, your insurer is entitled to deny the death benefit.
Term life insurance lasts a set number of years, like 5, 10, 15, 20, 25 or 30. Once this time is up, your coverage is no longer in effect. If you die after your term life policy has expired and you haven’t purchased a new policy, your beneficiaries won’t receive any money.
Most life insurance policies contain a clause excluding deaths caused by the policyholder’s willing participation in a crime. For example, if you steal a car and get killed as a result, your insurer likely won’t pay your beneficiaries.
Depending on your life insurance company, your policy might have specific exclusions. These are the most common ones:
Your insurer won’t pay the full death benefit. But if you purchased these riders with your policy, you might be able to access some of the money while you’re still alive:
For more comprehensive coverage, you can also purchase standalone long-term care and disability policies.
Yes — life insurance pays out if you die during a protest or as a result of police brutality. There are no exclusions relating to deaths due to protests or civil commotions, so your beneficiaries should receive the full death benefit.
However, some insurers include a clause for “illegal activity” in their policies — and the definition of such activity can vary. So, if you die while committing a crime, your insurer has the right to delay or deny the payout while investigating the claim.
Life insurance covers standard deaths, and your beneficiaries can use the money to maintain their lifestyles and pay for major living expenses. But if you die in suspicious circumstances or your insurer discovers you lied on your application, your loved ones might not receive the death benefit.
Secure the strongest possible policy by comparing life insurance companies.
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