What does life insurance cover?
Confused about life insurance? This guide can help. It can help explain what life insurance can cover, when it does (and doesn’t) usually pay out, and what the lump sum of money can be used for.
Most people know roughly what life insurance is – an insurance policy that can pay out a lump sum if you die.
But is there a catch? Are there times when the policy will and won’t pay out? And what’s the money actually for? Allow us to help explain.
What does life insurance cover?
Insurance policies are designed to cover you in case a particular event happens. In the case of life insurance, that event is your death. Life insurance is designed to cover you if you die – this is usually referred to as a death benefit.
The difference between life insurance and other insurance policies is that it’s not usually you who’ll claim the money – because, as difficult as it is to think about, you won’t be here anymore. Your life insurance can be claimed by your loved one’s
In some life insurance policies, you’re also covered if you’re diagnosed with a terminal illness. This is usually referred to as terminal illness benefit. This simply means that instead of being paid out in the event of your death, the lump sum can be paid out when you receive a terminal diagnosis. Insurers usually define this as a doctor diagnosing you to have a year or less to live.
When does life insurance pay out?
Life insurance can pay out if you die while you’re insured. For term life insurance, this means if you die within your policy term.
If your life insurance policy has a terminal illness benefit, it can pay out early if you’ve been diagnosed with a terminal illness or are diagnosed with 12 months or less to live.
When doesn’t life insurance pay out?
In short: life insurance typically pays out if you die while you’re insured.
In 2023, 96.7% of all life insurance claims process were paid out – Source: Association of British Insurers – so, for the most part, it pays out. But to be really clear, there are some instances in which life insurance won’t pay out:
- If you cancel your policy – as you’ll no longer be insured
- If you invalidate your policy – by missing monthly payments, for example
- If you die outside of your policy term – when you have term life cover
- If you meet an exclusion – e.g. death by suicide within the first year
- If you’re dishonest about your health when you apply
What’s a life insurance payout for?
This depends on your circumstances and the financial dependents you’ll leave behind. In general, a life insurance lump sum can be used to help make sure your loved ones, can cope financially without you. To cover any financial shortfall you’d may leave them with, so that it can leave a lump sum to help remove any possible financial burdens. The money’s often intended for things like:
- Paying off the mortgage
- Help pay the rent
- Help to raise dependents
- Paying for your funeral
- Paying off any other debts
Polly’s Summary
- Life insurance can cover the event of your death
- Some policies pay out early if you’re diagnosed with a terminal illness and given less than 12 months to live
- It is designed to pay out if you die while you’re insured and you were honest about your health when you applied
- It won’t pay out if you cancel your policy or die while you’re not insured, and might not if you meet an exclusion
- A life insurance payout can help make up for the financial shortfall you’d leave your loved ones if you die – helping them pay off the mortgage, pay for funeral costs or help raise dependents.
