What does term life insurance cover?
Learn what term life insurance covers and how much you may pay for your coverage before buying a policy.
Great question. We’re glad we asked. But really, there’s another question we should touch on first: Who does life insurance cover?
In short, it covers whomever your beneficiary is or beneficiaries are. Chances are, that’s someone you love and hold dear, like a spouse, your children, even a beloved nonprofit organization. And that’s who will receive a payout (called a death benefit) in the event that you pass away with term life insurance coverage in place.
Which brings us back to that original great question: What exactly does term life insurance cover? It turns out it helps cover whatever your loved ones want — or need — it to, including expenses both short-term (like funeral costs, burial expenses and other end-of-life financial obligations) and long-term (like college tuition or paying off a mortgage). Think of your insurance policy as a contract with your life insurance company. If you die before that contract expires, your loved ones will receive a death benefit payout based on how much coverage you buy.
As for determining how much life insurance coverage you’ll need, you can use a handy online needs calculator to see which term insurance policy is right for you. You might also consider what kinds of expenses your loved ones will face, and what kind of legacy you wish to leave behind. With all that in mind, here are seven common expenses people buy life insurance to help cover:
In this article:
1. End-of-life expenses
An obvious use for a life insurance policy is to cover end-of-life financial obligations including funeral costs and burial expenses. If you’ve never given much thought to what these final expenses cost, it might surprise you to know that the average funeral can have a $10,000 price tag.
If you’re single, covering those final expenses might fall to your parents, siblings or other family members. If you’re married, your spouse may be left to foot the bill. Grieving is hard enough. No one wants to stick their loved ones with a $10,000 bill at the same time.
2. Day-to-day bills
Think about what it costs to run your household, day in and day out. You may pay rent or have a mortgage. There’s food, utilities, health insurance, car payments, car insurance, clothes, school supplies, extracurricular activity fees for the kids… the list never ends.
Now, consider how your spouse or partner would handle this heavy financial obligation if something were to happen to you. Hopefully, you’ve built an emergency savings cushion that could help with some costs in the short-term, but a family shouldn’t need to deplete their emergency fund to get by.
A life insurance policy, however, could help your beneficiaries have a larger financial cushion for daily expenses. This lets you lift some of the financial burden off their shoulders so they can focus on getting themselves and your kids, if you have them, through the grieving process.
3. The mortgage
For many people, a house is one of their most significant assets and a key to their family’s financial stability for years to come. If you died and your partner faced the payments without your income, a life insurance policy could help protect your partner’s ability to pay the mortgage.
Knowing that life insurance proceeds can be put toward paying the mortgage can offer your partner the freedom to make decisions that are best for your family during a trying time. For example, should they stay in the house? Should they pay off the mortgage entirely? Does it make sense to downsize? Should they move closer to family? The ability to afford the monthly mortgage payment buys an immense amount of flexibility, time and peace of mind for your family.
4. Cosigned debts
Your mortgage is likely your biggest debt, but it may not be your only one. Credit cards, car loans, personal loans or student loans may also be lingering.
Thankfully, federal student loans are forgiven when the borrower (or the parent, in the case of Parent PLUS loans) dies. When you have other cosigned debts, either with a spouse, family member or someone else, their responsibility for repaying those debts doesn’t end when you pass away. Cosigners are jointly responsible for the debts and having to make the payments alone could put a strain on their finances.
A life insurance policy could allow them to pay off those debts so they’re no longer carrying the weight of those payments after you’re gone. Additionally, being able to pay off cosigned debts could protect their credit scores from damage caused by late payments or delinquencies if they wouldn’t be able to cover the debts otherwise.
5. Child care and other dependent expenses
Raising kids isn’t cheap; the federal government estimates that a middle-income family spends $12,980 each year per child. And that doesn’t include the additional cost of eventually putting them through college, which can add thousands more to the total.
Having kids is one of the best reasons to consider being insured. The lump sum payout associated with your term policy can be used to help pay for anything from daycare costs to summer camps to college expenses. That’s important for helping protect your growing family — and all the hopes and dreams they have for the future.
A life insurance policy can also help with paying costs associated with raising a special needs child. For example, they may require nursing care or special equipment, such as a wheelchair or feeding tube.
One more thing: You may think that the chief earner for the family is the only one who needs life insurance coverage. In reality, it’s just as important for stay-at-home parents to have a life insurance policy, considering all that they may do day-to-day to keep the household running. It’s estimated that the typical stay-at-home parent does tasks that are equal to around $160,000 a year worth of work. If your loved ones need to add daycare expenses into the family budget or hire a housekeeper because the stay-at-home-parent has passed away, a life insurance policy could be used to help cover the cost.
6. Medical expenses or long-term care—while you’re still living
Most life insurance policies offer an accelerated death benefit rider that allows the policy owner to access a portion of your death benefit before you die if you are diagnosed with a terminal illness. That could help you pay medical or other expenses related to long-term care during a time when you can’t work. Suffice it to say, this can be a huge expense—not to mention a hassle, during a time that’s already stressful—to take on without help. But please note, any funds tapped by the accelerated death benefit rider will reduce the overall death benefit once the policyholder passes away.
7. Leaving a legacy
There’s more to life than making sure the bills are paid. Many people also want to leave money to make things easier for their partners and children. Things like college tuition or a down payment on a child’s first home. Or, you might want to set aside money to support your favorite charitable causes after you’re gone.
Life insurance proceeds could be used to provide the funds needed to create those types of legacies if you’re not around to do it yourself. You can get a policy large enough to cover your family’s immediate needs, while also providing for longer-term financial goals.
It’s worth noting that in addition to life insurance, it’s important to speak with your attorney about establishing a living will or trust to help direct your survivors’ financial actions after your death.
Choosing a life insurance policy to help cover your needs
When shopping for a life insurance policy, you’ll usually choose between two types of coverage: term or permanent life insurance policies.
Term life insurance is a simple, affordable type of coverage that covers your loved ones for a set period of time — typically 10, 15, 20 or 30 years. The philosophy tied to term life insurance is that you have coverage in place during the years you need it most, such as until the mortgage is paid off or your kids are adults. You might be wondering what happens at the end of the term life insurance policy. Well, once the term length is up, coverage ends. (Some policies allow you to continue the policy, albeit at much higher premiums.) You do not get back the money you paid in insurance premiums. Think of it like car insurance, you have coverage in place in case something does happen.
Permanent life insurance (a well-known type being whole life insurance) covers you, well, permanently. It’s coverage for a lifetime — assuming you continue paying insurance premiums. This type of policy also includes a cash value accumulation feature that builds over time and can be borrowed from, say, during retirement or when your kids go to college. Keep in mind that borrowing from your policy reduces both the cash value and the death benefit.
The big difference between term coverage and permanent insurance policies, aside from the length of coverage, is cost. A permanent policy is typically more expensive than term policies which can be cost prohibitive for many families.
Let’s look at a price comparison between term coverage versus whole life insurance. A term life insurance quote for a healthy 35-year-old woman buying a 30-year, $500,000 term life insurance policy is about $36 per month. A $500,000 whole life insurance policy for that same woman is about $480 per month, according to State Farm.
Protecting your loved ones with life insurance
The purpose of life insurance is to help protect your loved ones from financial hardship if you were to die. While it may seem like there are many factors to consider when choosing a policy that adequately covers your loved one’s financial needs, it’s actually a lot simpler than you think.
A life insurance calculator is an easy-to-use tool for understanding your life insurance needs based on your income, debts, family structure and several other useful data points. It’s an ideal place to start when determining the right amount of coverage for you and how it fits into your budget. From there, you can easily apply online.
As to that first question about what your life insurance can cover? Well, life insurance can cover a lot, and it’s a way to help safeguard your loved ones’ futures. Once you have a policy in place, use it as the perfect opportunity to talk to your beneficiary about what you want your legacy to be if you were to die. It might seem like an intimidating conversion but really, buying life insurance tells your loved ones that you are in this for the long haul and you want to help ensure their financial needs are met, no matter what.
About Louis Wilson
Louis Wilson is a freelance writer whose work has appeared in a wide array of publications, both online and in print. He often writes about travel, sports, popular culture, men’s fashion and grooming, and more. He lives in Austin, Texas, where he has developed an unbridled passion for breakfast tacos, with his wife and two children.Read more by Louis Wilson
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Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our editorial policy
Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.
Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.
Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.
MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.
Haven Life Plus (Plus) is the marketing name for the Plus rider, which is included as part of the Haven Term policy and offers access to additional services and benefits at no cost or at a discount. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners). For more information about Haven Life Plus, please visit: https://havenlife.com/plus.html