No matter if you’re hoping to invest through your life insurance policy or you’re looking to leave money to grandchildren after you pass on, getting life insurance is important. However, to get the most out of your policy, you’ll need to be able to answer the question what does life insurance cover — and what types of lies or activities can cause your insurance company to void your policy after years of paying premiums.
What Does Life Insurance Cover?
A life insurance policy ensures financial support for your survivors when you die. As long as you pay your premiums on time every month and the policy is active when you die, the death benefit laid out in your contract will be paid to your beneficiary or beneficiaries.
This money can be used to replace the income that will no longer be provided by you and to pay mortgages or rent payments, debts, bills and other life expenses that your beneficiary is now solely responsible for. Insurance policies place no restrictions on how your beneficiaries can use the money from your death benefit, so your loved ones will be free to choose how they want to divide and utilize the money. Death benefits paid from life insurance policies are not taxable income.
The death benefit that you choose will determine how much you pay in premiums while your policy is active. If you select a higher death benefit, you’ll pay more in premiums. You can choose the amount of coverage you want, and your insurance provider will guide you through coverage options based on your income and the expenses that your loved ones will be likely to need assistance with after your passing.
In some cases, you might want to calculate a certain expense and allocate that amount of money through your policy. For example, you could secure enough coverage to pay for your children’s future college tuition or enough to pay off the current outstanding balance of your mortgage loan. Most people get enough coverage to cover end-of-life expenses and everyday expenses.
The death benefit will be paid out to your beneficiary upon your death, whether it was an accident, an illness or a death by natural causes. Natural causes are incidences such as old age, a heart attack or a stroke. Illnesses such as cancer, kidney failure and infection are also covered. Accidents such as a motor vehicle crash or drowning will be covered. If your death was a homicide, life insurance will cover it under certain circumstances. Suicide is also generally covered by life insurance policies but may not be with select life insurance companies.
What Does Life Insurance Not Cover?
- Policy ending before your death
- A lapse in payment
- No designated beneficiaries
- Homicide by or related to your beneficiary
- Suicide within set period -- usually 2 years from start of policy
- Fraud, such as lying on your application
- Risky recreational activities
- Risky occupations
The most important thing to know is that if your policy is not active at the time of your death, your death benefit will not be covered. For example, with term life insurance you need to make sure you take out a new policy after the term ends, otherwise there will not be any coverage.
Additionally, if you stop paying your premiums, then your policy will lapse and you will not be considered covered anymore. If your policy ends and you die before you fix it, then the death benefit will not be paid out.
Your death will not be covered if you do not have a designated beneficiary or beneficiaries. If you do not designate someone, or the beneficiary you did designate dies before you and you do not adjust the policy, coverage will not be given and the death benefit will be passed to your estate.
Homicide is covered by life insurance unless your beneficiary is the one who kills you, or your beneficiary is closely tied to your murder in some way. This contingency is referred to as the “Slayer Rule.” In the event that this situation occurs, your death benefit will be paid to your contingent beneficiaries or passed to your estate.
Per the suicide clause of a policy, suicide will not be covered if the death occurs during the contestability period, which is usually the first 2 years of the policy. While drug overdoses are generally considered to be an accident that is covered, the insurance company may investigate if the death occurs during the contestability period to determine whether it was actually an accident or not.
Life insurance is subject to fraud investigation just like any other type of insurance. If you lie about anything relating to your family history, medical conditions, alcohol and drug use, risky activities and hobbies or travel plans, the insurer can withhold the death benefit or cancel your policy altogether.
In addition, if you die while committing a crime, your policy will not offer coverage, and your insurance provider can choose not to pay out your death benefit.
Risky activities are recreational activities that have a high risk of injury or death. In the case of death during a risky activity, you may not be covered by your life insurance. It’s up to the insurer whether they want to insure you outright, deny you coverage or add an exclusion that prevents any death benefit in the case you die while engaging in the risky activity. Some activities that are considered risky include scuba diving, autoracing, rock and mountain climbing, skydiving and aviation.
The same exceptions for risky activities can also translate to some jobs. If you work as a logger or offshore fisherman (2 of the top jobs most likely to result in death), you may not get coverage in the case you die on the job. If your insurance provider does offer a policy to you and you have a risky job, be prepared to pay higher premiums for your coverage.
Cash Value Insurance: Investing with an Insurance Policy
In addition to providing you with the peace of mind that comes with knowing that your loved ones will be able to cover things like mortgage payments or college tuition after you die, you can also use your life insurance policy as an investment vehicle. Though this option only covers men and women with whole life insurance policies, the cash value component of these insurance coverage options make them appealing choices for policyholders who want to be sure that they’re leaving as much as possible to their beneficiaries.
The cash value portion of a life insurance policy is an account that accumulates money every time you pay your policy’s premium. It’s basically an investment account separate from the policy itself. It may take a while for your cash value to reach a significant value, but it can, in some cases and with enough time, reach the same amount as the death benefit of your policy.
You can withdraw money from the cash value, but doing so will result in a reduced death benefit for your beneficiary. The perk here is that withdrawals are tax-free as long as they don’t exceed the amount of premiums you’ve paid into the policy.
You can also borrow against the cash value of your policy and invest that money elsewhere. When you take out a loan against your life insurance policy, there is no need for a credit check, so this is generally easier than getting a loan from a bank, online lender or credit union. However, the loan does still accrue interest, so keep that in mind if you don’t want any funds deducted from your death benefit when you pass away.
Permanent life insurance policies allow you to overfund the policy as well. This practice means you can pay more into a policy than is required. The overfunded money will then go to your cash value. Overfunding can be beneficial if you plan to use the cash value at some point later in your life because it may grow through investments.
Best Life Insurance Plans
The company that you choose to underwrite your life insurance policy is almost as important as the policy itself, as not every insurance provider offers policies that are equally as beneficial. If you aren’t sure where you want to purchase your policy, consider starting your search with a few of our favorite life insurance providers below.
- securely through Ladder Life Insurance's websiteBest For:Adjustable coverage
Ladder Insurance Services, LLC (Cal. license # 0K22568; Ark. license # 3000140372) offers term life insurance policies: (i) in New York, on behalf of Allianz Life Insurance Company of New York, New York, NY (policy form # MN-26); and (ii) in all other states and the District of Columbia on behalf of Allianz Life Insurance Company of North America, Minneapolis, MN (policy form # ICC20P-AZ100 and # P-AZ100). Only Allianz Life Insurance Company of New York is authorized to issue life insurance in the state of New York. Insurance policy prices, coverages, features, terms, benefits, exclusions, limitations and available discounts vary among these insurers and are subject to qualifications. Each insurer is solely responsible for any claims and has financial responsibility for its own products.
- securely through Haven Life Insurance's websiteBest For:Under Age 64
Haven Term is a Term Life Insurance Policy (ICC21 Haven Term in certain states, including NC) issued by C.M. Life Insurance Company (C.M. Life), Enfield, CT 06082. In New York (DTC-NY) and California (DTC-CA), it is issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001.
Find Life Insurance Today
When it comes to understanding what is and isn’t covered by your life insurance policy, you should never guess. Thoroughly read and understand the terms and clauses in any insurance contract that you’re thinking about signing, and never sign onto a policy until you’re 100% positive that you know all of the caveats that will void your policy. If you have an accountant or estate attorney, you may also want them to review any potential policy you’re considering signing onto as well.
Frequently Asked Questions
What is not covered by life insurance?
Life insurance may not cover your death if you die engaging in risky behavior while committing a crime or after a suicide. Check with your individual life insurance provider to learn more about behaviors that will void your policy.
Does life insurance actually pay out?
Absolutely — a life insurance policy is a binding contract between you and your insurance provider, and your provider is legally obligated to pay out your death benefit if you die and your policy is active. However, you must fill out your application truthfully. Even the smallest lie concerning your health, habits, job or hobbies can void your policy.
What are the three main types of life insurance?
The three main types of life insurance are whole life, term life, and universal life insurance.
Benzinga crafted a specific methodology to rank life insurance. To see a comprehensive breakdown of our methodology, please visit our Life Insurance Methodology page.