What does Life Insurance Cover?

Your loved ones can spend the policy proceeds however they want. They can use the payout to cover:

• Everyday expenses: Such as groceries, monthly bills, and other day-to-day living expenses.
• Outstanding debts: This includes your home loan, auto loans, student loans, or credit card loans.
• Child or dependent care: Replacing services provided by the deceased spouse, like childcare.
• End of life expenses: Paying for end-of-life medical care and funeral expenses.
• College costs: Funding college tuition fees for children.

What types of death does life insurance cover

Life insurance covers almost all types of deaths. If the life insurance policy is in force, the life insurance company will process the death claims resulting from:

• Natural causes: For instance, old age or an illness.
• Accidental death: This includes accidental drug overdose
• Suicide: If the suicide exclusion period is over, the insurance company will issue the death benefit to the beneficiaries.
• Homicide: As long as the beneficiary has no role in the murder, the insurance carrier will pay out the death claim.

If the insured is severely ill, the life insurance company may agree to pay a part of the benefits before their death.

What life insurance does not cover

Now that we have answered the question "what does life insurance cover," let’s find out what it does not cover.

Life insurance will not issue a death benefit payout to your loved ones in certain circumstances, such as the following:

Expired Life Insurance Policies

If you let your insurance policy expire and pass away, your family will not receive the life insurance death benefit.

Life insurance is a contract between you and the insurance company. The insurance company promises to pay your life insurance beneficiary a death benefit if you die while the life insurance coverage is in force. If the policy lapses, the contract becomes void.

To prevent your life insurance coverage from lapsing, you must pay your premiums on time. Additionally, if you have a term life insurance policy, be mindful of when the term ends. Equally importantly, decide whether you still require the protection that life insurance offers or not. If you have a whole life insurance policy then you will not have to purchasing a new insurance policy as long as you continue to pay your premiums.

If you do, it is usually possible to renew the coverage or convert term life policies into permanent life insurance policies. If neither of those options is available, you may consider buying a new policy. However, you will spend more on a new term life insurance coverage than on the renewal of the old one. This is because, in the latter case, you will not have to take a medical exam.

Criminal Activity

Your insurer will not issue the death benefit to your beneficiary if you die while performing a criminal activity. For instance, if you pass away in a road accident while driving under the influence, your family will not receive the policy proceeds. Likewise, if you break into someone’s house and the homeowner shoots you in self-defense, then your loved ones will not get the payout.

Insurance Fraud

Lying on your insurance application amounts to fraud. The same goes for withholding information. Let’s say you smoke but declare yourself as a non-smoker on your application. If you die within two years of taking out the policy, the insurer can investigate the death and check the application for misrepresentation. In this instance, the insurer will reject the claim if it finds out the truth. And if they learn about it while you are still alive, they may cancel your life insurance coverage or increase your premium rate.

What life insurance might — or might not — cover

Not all scenarios are black or white. Like most things in life, there are grey areas in life insurance as well.

If your insurance policy does not address a grey area, you may be able to cover that part by adding a rider. A policy rider is an additional feature that you can add, usually at a small fee to gain extra coverage for a certain area.

Speak to an independent broker like Dundas Life to find out what riders you need for comprehensive life insurance policy.

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Death by Risky Hobby

In the eyes of life insurers, not all hobbies are equal. Any activity that increases the risk of injury or early death is a red flag for them. To compensate for this extra risk, the insurer may charge you a higher premium. However, sometimes, the insurer may even reject your request for coverage if you have a dangerous hobby.

So, what is a dangerous hobby in the first place?

The definition may differ from one life insurance company to another. However, most will classify activities such as bungee jumping, scuba diving, and sky diving as risky.

In most cases, you will manage to get a life policy with such a hobby, though you may have to pay a little extra. All the same, read the policy terms to ensure there are no additional exclusions.

Life insurance exclusions are circumstances or a situation that prevents your family from receiving the policy proceeds after your death. The last thing you would want is to assume your policy covers your favourite hobby and pay thousands of dollars in premiums over the years, only to have the death claim turned down when your family files it.

Death by Suicide

Suicide is the most common exclusion clause in a life insurance policy, but it comes with an end date. If the policyholder commits suicide within two years of taking out the policy, his or her family will not get the death benefit. The insurer, however, will pay the total premiums paid into the policy.

Medical Expenses While You are Still Alive

A free life insurance rider allows you to access some of your death benefits while you are still alive. The name of this benefit is accelerated death benefit, and it is usually included in your policy for free.

This life insurance benefits are triggered should you become terminally ill and have a life expectancy of 12 to 24 months. Some insurers, however, may issue an early payout only when your life expectancy is six months or less.

You can use the money to cover medical expenses and reduce the financial strain on your family in your final years. However, accessing your death benefit early will reduce the payout that your beneficiaries will receive upon your death.

Long Term Care

A long-term care rider is an optional add-on that you can add to your life policy by paying an additional fee. This benefit allows you to tap into your death benefit amount if you are no longer able to perform some of the activities for daily living. You can use the money to cover long-term care costs, like nursing homes, in-home services, etc.

Disability

Generally speaking, you will not be eligible for an early payout in the event of a short-term disability (lasting fewer than 90 days). In the case of a long-term disability, you may be able to use the accelerated death benefit rider to access a part of the death benefit early. You may use this money to cover medical bills or long-term care costs.

Choosing the Right Life Insurance Policy: Understanding Your Options

Choosing the right life insurance policy is a crucial decision that can have a long-term impact on your family’s financial future. With various types of life insurance available, it’s important to carefully evaluate your options and understand the key differences before making a commitment. Below, we explore the different types of life insurance policies, their benefits, and the factors you should consider when choosing the right one for your needs.

Understanding the Types of Life Insurance Policies

There are primarily two broad categories of life insurance: permanent life insurance and term life insurance. Each category offers distinct advantages and drawbacks, making them suitable for different situations. To help you better understand each type, we’ll explore the most common variations within these categories: whole life insurance, universal life insurance, term life insurance, and critical illness insurance.

1. Permanent Life Insurance

Permanent life insurance provides coverage for the duration of the policyholder’s life, as long as premiums are paid. It is generally more expensive but offers several benefits, such as cash value accumulation and the ability to build financial assets over time. The key types of permanent life insurance are whole life insurance and universal life insurance.

Whole Life Insurance

Whole life insurance is a type of permanent life insurance that provides lifetime coverage with guaranteed death benefits. It also has a cash value component, which accumulates over time and can be accessed via policy loans or withdrawals. The premiums for whole life insurance are typically fixed, which means they do not change throughout the policyholder’s life.

Advantages:

• Lifetime Coverage: Whole life insurance guarantees coverage for your entire lifetime, as long as premiums are paid.
• Cash Value Accumulation: A portion of your premiums goes toward building cash value, which can grow on a tax-deferred basis. The cash value can be used to cover premiums, take loans against, or even be cashed out if needed.
• Fixed Premiums: The premiums remain constant throughout the policyholder’s lifetime, making it easier to budget for the cost of coverage.

Disadvantages:

• High Premiums: The premiums are generally higher than those of short-term policies, which can make it less affordable for some policyholders.
• Limited Flexibility: While the policy is guaranteed, whole life insurance is less flexible than other forms of permanent life insurance.

Universal Life Insurance

Universal life insurance (UL) is another form of permanent life insurance, but it offers more flexibility compared to whole life insurance. With UL, policyholders have the ability to adjust their premiums and death benefits as needed. The cash value component grows based on interest rates set by the insurance company, and policyholders can choose how much of their premium goes toward the cost of insurance and how much is allocated to building cash value.

Advantages:

• Flexible Premiums and Benefits: Policyholders can adjust their premiums and death benefits according to their changing needs and financial situation.
• Cash Value Growth: The cash value grows based on the insurance company’s declared interest rates, which may fluctuate, providing the opportunity for higher returns compared to whole life insurance.
• Potential for Lower Premiums: Because of the flexibility in premium payments, it can be more affordable than whole life insurance, particularly in the early years.

Disadvantages:

• Complexity: The flexibility of of this type of insurance can make it more complicated to understand, as policyholders need to monitor both the premiums and cash value components to ensure they remain adequately covered.
• Risk of Cash Value Depletion: If the policyholder does not pay enough premiums or the interest rates are unfavorable, the cash value can deplete, potentially leading to a lapse in coverage.

2. Term Life Insurance

Term life insurance is designed to provide coverage for a specific period, typically ranging from 10 to 30 years. If the policyholder dies during the term, the beneficiary receives a death benefit payout. If the policyholder outlives the term, the coverage ends, and there is no payout.

Advantages:

• Affordable Premiums: It is generally the most affordable option, making it ideal for individuals who need coverage but have a limited budget.
• Simplicity: It is straightforward with no complex cash value component or flexibility in premiums and death benefits.
• Temporary Coverage: It is a good option if you need coverage for a specific period, such as while raising children or paying off a mortgage.

Disadvantages:

• No Cash Value: Unlike permanent life insurance, term life policies do not accumulate any cash value or provide a way to build financial assets over time.
• Coverage Ends: Once the term ends, the policy expires, and you may need to purchase a new policy if you still require coverage, often at a higher cost as you age.

3. Critical Illness Insurance

Critical illness insurance is designed to provide a lump sum payment if you are diagnosed with a serious illness, such as cancer, stroke, or heart disease. This type of policy can be used to cover medical expenses, living costs, or any other financial needs during your recovery.

Advantages:

• Financial Protection During Illness: Provides a lump sum payment when diagnosed with a critical illness, helping cover medical treatments, recovery expenses, or lost income.
• Peace of Mind: It offers peace of mind knowing you will have financial support if you are diagnosed with a serious illness that may impact your ability to work.

Disadvantages:

• Limited Coverage: Critical illness insurance only covers specific illnesses, which means it does not provide broad life coverage like other policies.
• High Premiums: It can be more expensive than other types of insurance, especially if you are in poor health or have a higher risk of developing certain conditions.

Key Factors to Consider When Choosing Life Insurance

Now that we’ve outlined the different types of life insurance, let’s look at the factors you should consider when choosing the right policy for your specific needs.

1. Your Age and Health

Age and health are crucial factors in determining the cost and availability of life insurance. Younger and healthier individuals typically qualify for lower premiums and more coverage options. As you get older or if your health declines, premiums can increase, and your eligibility for certain types of life insurance may be limited.

2. Your Financial Situation and Budget

Your budget will play a significant role in determining which life insurance policy is the most suitable for you. If you are on a tight budget, term life insurance may be the most cost-effective option, providing affordable coverage for a specific period. However, if you have a higher budget and are looking for lifetime coverage with cash value accumulation, permanent life insurance like whole life insurance may be more appropriate.

3. Your Family’s Needs and Dependents

Consider the needs of your family or dependents when deciding on coverage. If you have children, a mortgage, or other financial obligations that will extend beyond a specific period, permanent life insurance may offer more value and long-term security. If your financial obligations are temporary, such as while your children are young or your mortgage is being paid off, a term life policy may be more suitable.

4. Desired Death Benefit Amount

The death benefit amount is one of the most critical aspects of any life insurance policy. It’s important to select a policy with a death benefit that can adequately cover your family’s needs, including funeral costs, debts, and daily living expenses. You may want to consider how much life insurance coverage is necessary to ensure your family can maintain their standard of living if something were to happen to you.

5. Flexibility of the Policy

If you prefer flexibility in terms of premiums and coverage, universal life insurance might be the best option. It allows you to adjust both the premium and the death benefit, which is helpful if your financial situation changes. If you’re looking for a simpler, more straightforward policy, whole life or term life insurance may be more appropriate.

Making the Right Choice for You

Choosing the right life insurance policy requires careful consideration of your unique circumstances, including your age, health, budget, financial obligations, and long-term goals. While term life insurance may be ideal for those seeking affordable, temporary coverage, permanent life insurance options like whole life and universal life can provide lifelong protection and opportunities for cash value accumulation.

Before making a decision, it’s essential to review your needs, consult with an insurance professional, and compare various policies from different providers. By understanding the key differences between the various coverage options available and considering the factors that are most important to you, you can choose a policy that provides the right level of protection for you and your loved ones.

If you’re unsure where to start, working with an independent broker like Dundas Life can help you navigate your options and find the policy that best suits your needs and budget.

Conclusion

Life insurance protects your family’s financial security. It can keep them afloat after you are no longer there to provide for them. Before you sign up, take a moment to understand what life insurance covers and what it does not. And as far as finding the right policy for your family’s needs are concerned, you can count on Dundas Life to help you. We work with leading Canadian Insurers and can quickly provide you with multiple quotes. You can then pick the one that offers the best value and coverage for you. There are many factors that you must take into account to determine if you need life insurance, couple of the factors to look out for are the coverage, the benefits and the payments.

Frequently Asked Questions

How much life insurance do I need?

This is a difficult question to answer without knowing more about your personal circumstances. Some factors to consider include: whether you have dependents, your age and health, your income and debts, and your overall financial goals.
Generally speaking, you should have enough life insurance to cover your dependents' needs in the event of your death. This could include things like income replacement, paying off debts, and covering education costs. The amount you need will depend on your individual situation.

What are the benefits of life insurance?

There are many benefits of life insurance, including providing financial security for your loved ones, helping to cover expenses in the event of your death, and giving you peace of mind.
If you have life insurance, your family will have one less worry to deal with in the event of your death. They will know that they have some financial security, and that they will be able to cover expenses such as funeral costs, outstanding debts, and everyday living expenses.

What are the drawbacks of life insurance?

There are a few potential drawbacks of life insurance that are worth considering before purchasing a policy. First, life insurance can be expensive, especially if you are young and healthy. The premiums can also increase over time, which can make it difficult to keep up with the payments. Additionally, life insurance policies have a waiting period before they pay out, which means that if you die within the first few years of the policy, your beneficiaries may not receive anything.