Life insurance is something you buy but hope you'll never need. Should you unexpectedly pass away, your policy will pay out a death benefit to whomever is listed as the beneficiary. That money can provide your loved ones with much-needed financial support after you're gone.
Like any insurance policy, life insurance has its stipulations and restrictions. Certain causes of death are excluded, but there are some unusual scenarios that are included in most policies. Here are four surprising things life insurance usually covers.
4 Surprising Things Life Insurance Will Cover
1. Freak Accidents
From meteorite impacts to bee stings, life insurance covers all kinds of freak accidents. Any excluded causes of death should be listed in the policy. For example, some exclude deaths caused by certain high-risk activities, such as rock climbing or cliff diving. If you enjoy certain adrenaline-fueled hobbies, you'll want a policy that will cover you if the unthinkable were to happen. That said, most accidents are covered (even bizarre ones).
2. Deaths That Occur Outside of the U.S.
In most cases, life insurance companies will pay out a death benefit if the policyholder passes away while in another country. (However, some insurers may not approve the claim unless the policy has been active for at least two years.) The beneficiary will still need to provide proof of death, just like in the United States. This usually involves filing a foreign death claim. The U.S. embassy in that country can be a good resource in that situation.
The claim may be denied if the policyholder died while engaging in an excluded high-risk activity or was traveling in a country that's been deemed unsafe for travelers. Again, every policy has its own stipulations, so be sure to read the fine print.
3. Acts of Terrorism
According to the Insurance Information Institute, life insurance policies do not have exclusions for acts of terrorism. If a terrorist attack ends up being fatal, the policyholder's beneficiary should receive the death benefit. An important distinction, however, is acts of war are rarely covered. Nuclear, biological, chemical and radiological events might also be excluded.
4. Suicide
Some life insurance policies will cover death by suicide if the policy has been active for a certain amount of time (usually two years). If not, the insurer may deny the death benefit payout.
What Can a Life Insurance Payout Be Used For?
If the policyholder passes away, and the cause of death is covered, the beneficiary must file a claim to receive the death benefit. They can use this money any way they like—there are no restrictions. They may opt for a lump sum or choose to receive income payments over time. Below are some ways beneficiaries might spend these funds:
- Covering funeral expenses: The median cost of a funeral is $7,848, according to the latest numbers from the National Funeral Directors Association. A life insurance payout can help ease the financial burden.
- Replacing lost income: A death in the family is often devastating, especially for those who relied on that person for income. Life insurance can provide a reliable source of income that allows the family to maintain their lifestyle and reach their long-term financial goals.
- Paying down debt: Beneficiaries aren't obligated to pay the policyholder's debts after they're gone. However, they can use this money to pay down their own debt.
- Saving for retirement: One retirement planning rule of thumb is to have 10 times your current salary saved by the time you're 67. A life insurance death benefit can be used to shore up the beneficiary's nest egg.
What Doesn't Life Insurance Cover?
If the policyholder passes away from an excluded cause of death, their beneficiary will not receive a payout. That can include foul play, like suspicious circumstances around the person's death that involves the beneficiary. However, a death caused by an illness, accident, act of terrorism or suicide will likely be covered.
These kinds of things aren't fun to think about, but life insurance is a necessary part of financial planning. Maintaining strong credit is just as valuable. It's precisely why Experian lets you check your credit report and credit score for free. Look at it as one more way to plan for the future.