4 Things You Want Your Life Insurance Policy to Cover
Death is never a fun topic. But the truth is, it’s a fact of life (it happens to roughly 100 percent of people!), and it’s something we all need to think about. If you have a family that depends on you financially, the last thing you want is to leave them without the support they need. That’s where a life insurance policy comes in!
What Is Life Insurance?
Life insurance is a form of protection, and can give you peace of mind, especially if you work for yourself. It’s a tax-free, cash payment that goes to your loved ones in the event of your death. It allows them to continue pursuing their dreams without an additional financial burden.
How Are Funds from a Life Insurance Policy Transferred?
When a life insurance policyholder passes away, the beneficiary (the person who will receive the funds) typically has to file a death claim with the insurance company. The insurance company has 30 days to review the claim and pay it. This time frame may be delayed under rare circumstances (e.g. the insured person was very young), but if it is, the insurance company will pay interest on the policy.
Insurance companies sometimes offer the funds as a lump sum (meaning you get it all at once), while others allow you to receive it in installments over time.
What Does That Money Actually Cover?
Once a beneficiary receives the money from a life insurance policy, they can use it for a variety of expenses. These are some of the expenses life insurance can help your family cover:
1. Terminal and Critical Illnesses
When you purchase life insurance, you will have the option of adding an accelerated death benefit rider to your policy. This is a fancy term, but all it means is that if you are diagnosed with a terminal illness, you can draw money out of your life insurance policy to pay for medical expenses and life-extending treatment. The amount you take out reduces how much your family will receive when you pass away.
If you have a specific illness that isn’t necessarily terminal, but may shorten your lifespan (think: cancer, heart attacks, AIDS, or ALS), you can also choose to add a critical illness rider to your policy. This add-on lets you use money from your policy on medical bills related to that illness. Your insurance company will have a list of these injuries and illnesses that you can use your insurance plan for.
2. Long-term Care and Nursing Home Services
With the costs of long-term care on the rise, many people realize that they may need more money in retirement than they previously thought. One way to handle those expenses is to include a long-term care rider on a life insurance policy. This policy add-on uses money from your life insurance policy to pay for long-term care, nursing home stays, and private in-home care. While long-term care insurance is available on its own, it’s often very expensive, so an add-on is a good way to go.
3. End-of-life Expenses
Did you know that burial and funeral services average $10,000? Life insurance makes sure your family isn’t stuck footing that bill. You can get a small life insurance policy that specifically covers burial and funeral costs, but these policies are expensive for the amount of value they offer. We suggest simply adding around $10,000 to the amount you want your life insurance to cover. In fact, term life insurance is so inexpensive that adding another $10,000 or $20,000 to the face value won’t bump up your monthly payments by more than a few dollars.
4. Debts With a Co-Signer
When you die, some debts are forgiven (goodbye student loans). Unfortunately, anyone who co-signed a loan or credit card with you will be stuck with the bill if you can’t pay it. If you have joint debt with anyone, make sure you cover that amount with your life insurance policy and include them as a beneficiary. For example, if your parents co-signed a personal loan with you, allocate a percentage of your life insurance specifically to them.
If you’d like your partner to be able to stay in the home you share, make sure your policy is large enough to pay off the mortgage and designate them as a beneficiary. If you only work part-time as a freelancer, but your death would mean that your spouse would have to hire before and after school childcare and a housekeeper, consider a policy that can cover those costs, too.
Where Do You Get Started?
We know this is a lot to think about. To get started, talk with your family members; this is a sensitive, but important decision, and you want to make sure your policy suits your family’s needs. Once you’re ready to begin exploring your options, review our policies built exclusively for people who work for themselves… and be sure to reach out to our team with any questions.
Peter Colis is the co-founder and CEO of Ethos. Ethos is a new kind of life insurance company built for people who don't have time for fine print, extra doctors appointments, or hidden fees.