What Is Covered by My Life Insurance Policy?

Your life insurance policy will pay a death benefit to your beneficiary if you die due to natural causes, you were the victim in an accident or homicide or, in some cases, if you commit suicide. Your beneficiary can spend the death benefit however they want. For example, it can be used to repay joint debt, start a college fund or pay for childcare.

Learn what your loved ones can do with a life insurance benefit as well as how to calculate how much coverage you should get.

Key Takeaways Life insurers will pay a death benefit if the insured dies of natural causes, an accident or homicide. Policies usually include a suicide clause, which excludes suicide as a covered death if committed within the first two years of buying the policy. The death benefit from a life insurance payout can be used to pay for outstanding loans, college tuition and other life expenses.

What Causes of Death Are Covered by Life Insurance?

Nearly all deaths are covered by life insurance policies, except for a few specific exceptions. Below are some examples when an insurer would pay a death benefit to a beneficiary when the insured dies:

• Natural causes (e.g., heart disease, cancer, diabetes, pneumonia, Alzheimer’s, Parkinson’s)
• Accidents
• Homicide
• Suicide (if committed after the policy’s suicide clause, usually active during the first two years of buying the policy)

What Causes of Death Aren’t Covered?

While life insurance policies will cover several causes of death, there are some circumstances that may not be covered. For instance, if you die while committing an illegal activity, your beneficiaries may not be entitled to the death benefit.

Policyholders should also be aware of the policy’s suicide clause. This provision limits or excludes coverage if the insured takes their own life within a certain period after the policy's effective date — usually one or two years.

If you provide false or misleading information on your life insurance application, the policy may be invalidated. For example, let’s say you purchase a policy but tell the insurance company that you don’t do parkour through the Grand Canyon knowing full well you do. One year later, you tragically died while doing said activity. Your insurance carrier may not pay out because you never disclosed this high-risk hobby when you purchased your policy. (However, if you picked up these extreme sports after purchasing the policy, your family may still get a payout.)^[9]

What To Do With a Life Insurance Payout

Life insurance death benefits can be used to help pay for college, pay down debt and other bills, as well as help cover childcare and end-of-life expenses. Below is a look at the many options available when your life insurance company sends a death benefit.

Bills and Expenses

Beneficiaries can use the death benefit to pay for all types of daily living expenses and regular bills. Some examples include:

Groceries	Rent
Vehicle maintenance	Public transportation
Insurance	Travel expenses
Utility bills	Cell phones
Pet care	Clothing/personal care
Retirement	Emergency funds
Entertainment	Memberships/subscriptions

The monthly average for expenditures in a U.S. household is $5,577.^[1] A life insurance payout can help ease the stress of having to pay nearly $67,000 a year. Keep in mind that your spouse or partner may want to purchase their own life insurance policy to help guarantee a future for any children they may have.

College Tuition and Education

Your death benefit can help cover your child’s college tuition, allowing you to rest easy knowing that their higher education costs are paid. Look at it this way, the average cost of college for a single child in the U.S. is $39,000.^[2] Add the cost of room and board, books and supplies and transportation, you may be looking at $58,000 total — higher if your child chooses a prestigious university.

Co-Signed Debt

A death benefit can lighten the burden of repaying joint debt when the insured dies, especially if they were the primary breadwinner. For example, if your spouse co-signed your mortgage loan, it would fall on them to continue making mortgage payments.

Consider that married couples carry over 120% more debt than someone who is single.^[3] Experian shares the following data comparing the debt of a single person to that of a married couple:

Married	$112,627
Single	$51,264
U.S. Average	$92,479

If you die, your spouse may struggle with making co-debt payments alone and without support.

Fortunately, the sole debt of a spouse is not held to their surviving partner to repay in the case of death unless state law says otherwise.^[4]

Childcare

The benefit received from a life insurance policy can help cover the costs associated with childcare. This is especially important if you're the one bringing in the paycheck for your family. If you die and your surviving spouse needs to work, any children you have will need to be looked after. Below, you can see the average weekly cost of childcare:^[5]

Type of Care	One Child	Two Children
Nanny	$694	$715
Child Care Center	$226	$429
Family Care Center	$221	$420
After-School Sitter	$261	$269

The annual cost can be as high as $34,320.

Inheritance

You can name your child as the beneficiary of your life insurance policy, which means that the death benefit payout will go directly to your child in the event of your death. This can provide a way to leave a financial legacy for your child and help support their future financial needs.

If your child is a minor, you may want to consider setting up a trust to hold the proceeds until your child reaches adulthood or a specified age. This can help ensure that the funds are managed appropriately and used for your child's benefit.

End-of-Life Expenses

End-of-life expenses can include funeral or cremation expenses, as well as travel arrangements for family members and any medical expenses that may have accrued before your death. Burial expenses, in particular, can put a hole in your loved one’s wallet.

According to the National Funeral Directors Association the total median cost of a funeral can add up to nearly $10,000.^[6]

Type of Cost	Median Price	Description
Non-Declinable Basic Services Fee	$2,300	Typically added to cover the provider’s overhead costs
Removal/Transfer of Remains To Funeral Home	$350	Body is typically taken away by a staff member from the funeral home.
Embalming	$775	Body is prepared for longevity.
Other Preparation of The Body	$275	May include specific clothing, makeup, jewelry, etc.
Use of Facilities/Staff for Viewing	$450	Staff used to operate the funeral home
Use of Facilities/Staff for Funeral Ceremony	$515	Staff used to operate equipment associated with burial.
Hearse	$350	Transportation to the burial site for the deceased.
Service Car/Van	$150	Transportation to the burial site for close family and friends
Printed Materials (Basic Memorial Package)	$183	Informational pamphlets and event schedule for the funeral
Metal Burial Casket	$2,500	Permanent storage for the deceased
Vault	$1,572	Typically concrete enclosures to protect caskets from the weight of dirt and vehicles and protection against insects.
Total	$9,420

Medical Expenses and Long-Term Care

If your policy has an accelerated death benefit rider and you have a terminal illness, it may be possible to access your death benefit before you die. Doing so will help you pay for any extended nursing care you may need while you’re still alive, helping to lighten this financial burden carried by your loved ones.

Additionally, if you suffer a severe injury and haven’t died, resulting in the loss of a limb or significant impairment, you may be eligible for a payout under accidental death and dismemberment coverage. Essentially, any long-term care needed to help with a loved one’s quality of life can potentially be paid for through an AD&D payout. AD&D coverage can cost as low as $4.50 per every $100,000 of coverage or $25 per every $500,000 of coverage.^[7]

Charitable Contributions

You can use your life insurance policy to make charitable contributions by naming a charity as the beneficiary of your policy. This means that upon your death, the charity will receive the death benefit payout instead of a family member or other individual beneficiary.

Annuities

The payout from your life insurance policy could be converted into an annuity. Your loved ones would get guaranteed payments until the payout is complete. Additionally, the annuity would build interest. Keep in mind that you will need to pay taxes on the interest income.

Who Needs Life Insurance?

Life insurance is especially useful for those who want their loved ones financially covered in the event of their death. Here are some examples:

• People who have dependents: For example, you may want the death benefit to pay for your child’s college education or your parent’s medical bills in the event of your death.
• Breadwinners: If you were the primary source of household income, the death benefit can help cover rent or mortgage payments plus daily living expenses.
• People with co-signed debt: If you designate your spouse as the beneficiary, they can use the death benefit to pay off the mortgage or other shared debt.
• Estate planning: This includes covering any estate taxes that may be owed or providing an inheritance for your heirs.

How Do I Know How Much Life Insurance to Get?

To choose the right amount of life insurance to buy, you can use the human life value method, multiply your income by 10 or use the DIME formula.

Human Life Value

To calculate human life value, take the value of your future earnings and use of the following formulas:^[10]

• 30x your income between the ages of 18 and 40
• 20x income for age 41-50; 15X income for age 51-60
• 10x income for age 61-65

Those older than 65 can use their net worth to calculate their payout.

Income Multiplied by 10

This is straightforward. Just make sure you also factor in the cost of college for each child you have in addition to your income. See above for the cost of higher education.

DIME Formula

The DIME formula considers four factors to calculate how much life insurance coverage you should buy: debt, income, mortgage and education.^[10]

• Debt: This will include car loans, mortgages, burial and other final expenses and any credit card debt.
• Income: Take your annual income and multiply it by the number of years it will take your youngest child to graduate high school.
• Mortgage: You can get the balance of your mortgage from your lender or you can look at your last statement.
• Education: Remember: the average cost of a U.S. college education for a single child is $39,000.^[2] You will need to adjust this figure based on how many children you have.

Once you've gathered all that information, add it up and you'll have your coverage amount.