What Does Life Insurance Cover?

In most cases, life insurance policies provide a financial safety net for your loved ones if you pass away. But your cause of death must fall within certain guidelines in order to receive the death benefit.

Your beneficiaries can use your death benefit to cover any expenses, whether it’s related to funeral costs or everyday expenses. If the policyholder was the breadwinner of the family, there will likely be a large gap to cover.

According to a Statista report published in 2022, 37% of life insurance policyholders said they purchased a life insurance policy with the intent to replace their income. And 30% reported they purchased a life insurance policy for burial expenses.

Keep in mind that there aren’t guidelines on what you can use a death benefit for. If you are the beneficiary, you can use the death benefit to cover whatever you deem necessary.

There are two main types of life insurance — term and permanent. They both cover the same types of deaths listed above, and you can use the death benefit to cover any of your expenses. However, there are some differences in coverage length rules.

Term life insurance will only provide coverage if the policyholder passes away while the policy is active. You select the length of your term when you purchase the policy. Common term lengths are 10, 20 or 30 years.

Permanent life insurance offers lifelong coverage. If your premiums are paid, then your beneficiary will always receive a death benefit.

All permanent policies have a cash value component, which grows tax deferred. With most policies, you can borrow from your cash value while you’re still alive. You could use these funds to cover retirement goals or unexpected medical costs.

How the policyholder passes away determines if the beneficiary receives a death benefit or not. There are specific types of death that most life insurance companies do not cover. The way you fill out your life insurance application will also determine if you get coverage or not.

After all necessary documents are sent to the life insurance company, life insurance benefits typically take 30 to 60 days to be paid out. If there are any missing documentation, the process will likely take longer.

If are the beneficiary and want to receive the death benefit closer to the 30-day time frame, make sure you have all required documents. This includes, but isn’t limited to, the certified death report, a police report, toxicology report and autopsy.

There are two common approaches to calculating how much life insurance you need.

For a simplified estimate, multiply your income by 10. For example, if your salary is $75,000, you should get at least $750,000 of coverage.

If you want a more realistic life insurance coverage estimate — use the DIME rule. DIME is an acronym that stands for debt, income, mortgage and education. If you have outstanding debt, a mortgage or children you want to send to college, the DIME rule will give you a better estimate of the coverage you need.

You can use a life insurance calculator if you’re having difficulty determining how much coverage you need.