In order to get enough life insurance coverage for your family, it’s important to understand what the life insurance benefits might be used to cover.
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A life insurance policy offers financial protection, plain and simple. If the policy is in your name, the life insurance company will pay the death benefit to your beneficiaries after you pass away. So in that sense, buying life insurance is a way of providing financial support to your loved ones even after you’re gone.
But who exactly can be a beneficiary to a life insurance policy, and what can they use the funds for? Knowing the ins and outs of a life insurance plan and how beneficiaries might use the death benefit is key to determining what coverage makes the most sense for you and your loved ones — so let’s learn more.
Typically, beneficiaries are a person’s spouse, common law partner, children, or stepchildren. But you could also name your parents, siblings, or any other relative — not to mention friends or even charitable organizations — as your beneficiary. What’s most important is that you name the beneficiaries upfront to ensure that the people you want to receive the death benefit actually do, well, benefit.
While only the stated beneficiary can use the funds from a life insurance policy, they can use them in a variety of ways. This money isn’t just for funeral expenses, but instead can be used to cover debts, lost income, and even pay for college tuition. Depending on the policy type (whether it’s whole life insurance, term life insurance, or variable universal life insurance), payouts can come in different forms — including annuities, installment payments, and lump-sum.
Originally, life insurance policies were designed to help with funeral costs and to provide care for widows and children after the death of the primary earner. But the world has moved on: for one thing, in a couple, both spouses might now work. So in today’s world, life insurance can be used to cover a whole host of expenses.
What your policy covers depends upon the type of coverage you have, but in most cases, the aim is to protect the beneficiaries from financial hardship.
Another important note: some life insurance policies offer both death and living benefits. We’ll talk more about the living benefit below, but for now, suffice it to say that you can add a living benefit as a rider to allow the policyholder (in this case, you) to withdraw a certain amount of money against the face value of the policy. This means that, under certain conditions, the policyholder can be the beneficiary of the life insurance policy while the policyholder is still living.
Before you decide to stage a car accident ala The Postman Always Rings Twice, remember that life insurance doesn’t cover “unnatural deaths.” Instead, most life insurance policies cover what they call “natural” or “accidental” deaths.
So what constitutes a “natural” death? Heart attacks, old age, and many diseases are covered under most life insurance policies. Most companies will also cover suicide if it occurs after two years of the policy purchase. But an incredibly important consideration: some pre-existing conditions might not be covered by a life insurance policy, so it’s important to speak with the insurance provider at the time of purchase to understand what they’ll cover.
When it comes to outstanding debt, life insurance can offset any financial strain that your beneficiaries may face. Death benefits can be used to help with repayments on mortgages, student loans, medical expenses, and even credit card expenses.
Depending on the extent of your financial obligations (aka how much debt you’re carrying), you can decide how much coverage to purchase for your life insurance plan. That way, you can feel confident that your beneficiaries will have the funds to cover any debt they inherit.
Likewise, if your family only has one primary source of income, the death of the family breadwinner can be financially ruinous. If that’s the case, beneficiaries can use the death benefit to pay for monthly bills — including groceries, utilities, and childcare costs — as well as to help with other unexpected expenses that might come up.
When a person passes away, their assets can still be taxed. (Fast tax fact: the tax rate depends on where the person lived and how much their estate is worth.) A life insurance policy payout can help to cover these taxes and can be used for estate planning.
Most policies also include end-of-life expenses, which can include the hiring of an attorney to close out accounts in the name of the policyholder. After doing so, the attorney can then officially report the death of the policyholder to the IRS and the county, which is often when unforeseen expenses, such as inheritance taxes, arise.
Life insurance policy can also be used to cover a child’s higher education expenses. If you think that your policy might be used to cover university tuition, you’ll want to mention this during the underwriting process. Education is expensive, and this could considerably increase the benefit amount of your policy — so you’ll want to factor this in when initially buying your policy.
While most life insurance is purchased to provide post-mortem financial protection, some policies coverage can be used while the policyholder is still alive. In the case of an accidental injury, for example, the policyholder could tap into their life insurance policy to pay for expenses.
So how does this work? With permanent life insurance policies — both whole life insurance policy and universal life insurance policy — you can add a death benefit rider, which would give you access to a certain percentage of the death benefit while you’re still alive. You, as the policyholder, could then use your own life insurance policy to pay for medical expenses that result from an accidental injury.
Similarly, purchasing long-term care insurance or adding a living benefit rider to your life insurance policy can save you from medical debt in the event of serious, chronic, or terminal illness or debilitating injury. Living benefits can be used to pay for long-term medical expenses, hospice care, caretakers, and the like.
Just know that living benefits pull from the death benefit, which means that there will be less available to any beneficiaries later.
That’s a personal decision for you to make, but here’s what we can tell you: as of 2021, just over half of all Americans had life insurance, and we know that having adequate coverage can help keep your family financially supported even after you’re gone.
At the very least, we suggest you familiarize yourself with policy variations and terminology, so that if you choose to buy, you can buy with confidence.
If you’re thinking about purchasing life insurance, we suggest you spend a time shopping around for the right policy for your needs. Marble can help you compare quotes, premium payments, and the coverage each policy offers. And if all this still sounds confusing, you might want to speak with your insurance agent or a financial planner to make sure you’re getting enough coverage for your needs.
And whatever you decide to do, you can always add your life insurance policy (or home or auto or renters insurance) to your Marble wallet. You’ll be able to easily keep track of your coverage while also earning rewards just for being protected.
