What Expenses Can Term Life Insurance Cover
When a loved one passes on, it’s only natural to be asking, “What expenses can term life insurance cover anyway?”
What do you even buy life insurance for?
After all, you may be the primary beneficiary in charge of handling the insurance payout.
Not only do you have final expenses to cover but you may be neck-deep in the grieving process as well. On the other hand, you may be planning ahead for your family.
Either way, it’s tough stuff—I get it.
In fact, these are the situations that motivated clothing lines to make the “Not Adulting Today” t-shirts. Handling a term life insurance payout is a tall order.
But, this post will help you make sense of it all.
Think about it, though.
You’re talking about something that will probably happen 20 or 30 years from now, right?
Remember, no one should have to face more stress than the heaviness of a loved one’s passing.
Plus, in the event of your own untimely death, you’d want to ensure your family’s peace of mind and financial security.
Basically, knowing the answer to the title questions is paramount to both you and your family.
So, let’s dive in!
Understand the Importance of a Named Beneficiary
As you may know, term life insurance is well-known to some as “pure” life insurance.
The reason? Term life insurance—as opposed to whole life insurance or permanent life insurance—provides only the death benefit.
There is no investment component when it comes to term life insurance.
For that reason, it’s pretty straightforward.
Even with this attractive simplicity, you’ve got to have your ducks in a row to make it work as you hope.
First, it’s required to name a beneficiary—the one who will receive the insurance death benefit.
Now, if you’re asking, “what expenses can term life insurance pay?” then there’s a good chance you’re either the beneficiary or you are naming one for your own policy.
Either way, it’s vital to understand the importance of this role before you buy a term life policy
A beneficiary is a person assigned to receive the insurance payout after the policy holder’s demise.
Naturally, if the level term life insurance policy expires before the insured’s death then no one receives any sort of payout.
In this case, the policy simply served as a safety net.
It’s possible to name more than one beneficiary per policy, assigning a primary and also a secondary (or contingent) beneficiary should the primary pass away before the policyholder, or assign a percentage of the payout to each beneficiary.
For example, you may want to leave 30 percent to your spouse and 70 percent to your children so that the assigned benefit covers everyone sufficiently.
Lastly, and this is the most important part, a named beneficiary needs to know the details of the policy—policy number, insurance company contact information, how to file the claim, etc.
Whether you assign a beneficiary to your own term life insurance policy or you are the beneficiary, don’t forget about the details. Otherwise, covering expenses is going to get a bit tricky.
How to Make Sense of the Payout Options
A life insurance payout is the amount of money designated for a beneficiary once the insured has passed away.
Typically, the beneficiary must file a death claim and also submit a certified death certificate.
The payout, or settlement options, are the same no matter what type of term life insurance or permanent insurance you buy.
Keep in mind that a life insurance payout isn’t taxable like gross income.
The money is usually received income tax-free with a few specific exceptions for businesses and in complex estate planning situations that involve trusts and gifting rules.
However, you must report any interest you receive.
The way insurance companies pay beneficiaries has changed over the years.
Previously, the only type of payment available was a lump sum.
Holding a hefty wad of cash in your hands may seem like a great option, but for some, it’s more stressful than helpful.
Thankfully, insurance companies recognized the need for more payout choices.
Now, there’s the option of the traditional lump sum or installment payments.
This sort of trickle payment type tends to work well for those a lump sum may overwhelm.
With that said, what expenses can term life insurance cover?
The answer may depend on when the insurance company actually releases the payout.
Unchallenged, a claim may take 30-60 days to process.
Typically, the possible accrued interest motivates insurance companies to pay in a timely manner.
Timely payouts are most often challenged when the cause of death or situation surrounding it is in question such as in a violent crime.
Delays happen but it’s quite uncommon.
Consider the Most Common Payout Use
Paying for final expenses is the most common answer to the “what expenses can term life insurance cover?” question.
Generally, funerals don’t motivate happy thoughts.
Yet, knowing a policy can cover final expenses offers a unique sense of comfort.
Plus, using a term life insurance payout to pay for a funeral ensures you actually have the money on-hand (barring any hold-ups at the insurance company).
Unlike money assigned in your will or even a savings account, a payout won’t be required to go through probate.
Unsurprisingly, funerals cost a lot more than they did once upon yesteryear.
The price and services vary from state to state as well.
By researching funeral expenses by state using the tools on the Funeral Consumers Alliance (FCA) site, you can get an idea of how much a funeral will cost.
This is an option for both insured and beneficiaries.
Know When to Cover Expenses or Debt
If you’re like most people, you sometimes worry about paying off debt after death for either you as the insured or the beneficiary.
After all, leaving debt for your remaining family probably isn’t the legacy you want to leave behind.
Though sometimes, it’s simply unavoidable such as medical bills or final expenses.
The most common questions revolve around the notion of knowing who pays for what.
And this can quickly get complicated.
Especially if creditors are involved, attempting to pressure a payment out of someone…anyone.
But, what expenses can term life insurance cover aside from final expenses?
Really, a large part of this responsibility is up to the beneficiary and the financial relationship they had with the insured.
So, it’s important to be aware of these elements:
- Who is paying the premium
- Joint accounts
- Co-signers
- Laws of your state regarding spousal responsibilities
Auto Loans
Another common financial concern is knowing how to handle an auto loan.
Again, auto loans deal with property so a lender can physically repossess it.
It’s a lender’s way of securing themselves.
Anyone who co-signed on the loan would be responsible for it.
However, the deceased’s estate can also cover this expense.
Or, the person who inherits the car can simply take over the payments.
Mortgage
For example, as a joint account holder or a spouse (in some states), a mortgage may fall back on you.
However, a mortgage is a secured loan so the lender can foreclose.
Typically, the lender won’t hold a beneficiary accountable to pay off the mortgage.
Furthermore, a mortgage lender is going to pursue the deceased’s estate in probate first to collect on any remaining mortgage.
Keep in mind that the insured can name an estate as the beneficiary, blurring the lines a bit.
Credit Cards
Credit cards present another valid financial worry for remaining family members.
Unlike a mortgage or an auto loan, credit cards are unsecured debt (not guaranteed by assets such as a house or a car).
Essentially, there’s nothing to take back.
And, collections agencies certainly can’t come and take back any gadget or piece of clothing the credit card holder purchased.
Again, unless you’re a joint account holder, creditors can’t typically touch an insurance payout.
Paying that sort of debt is strictly up to the beneficiary.
Medical Bills
Firstly, Medicaid is incredibly complicated and the rules vary from state to state.
Your best bet is to talk to an experienced attorney.
If you have permanent life insurance you won’t even qualify for state Medicaid unless the policy is a simple burial policy.
Any cash value in a life insurance policy would be considered a “countable asset” for qualification purposes.
If you are terminally ill, many of today’s modern level premium term policies contain an accelerated death benefit provision.
This option allows you and your family to access policy benefits before you die.
This can be a very important planning tool and to help allow you to die with dignity after spending quality time with your family.
This is something most families rarely think about ahead of time, as it’s a very fragile emotional place.
With that said, medical bills are often the hardest bills to pre-plan for.
Furthermore, as in the case with other debts, responsibility may depend on whether the estate is solvent or insolvent. In other words, does the estate have enough money to pay the bills or not?
Creditors have a certain amount of time to pursue the estate through probate. After that, it depends on those three big elements -joint accounts, co-signers, and the laws in your state regarding spousal responsibility.
Take the Next Step
Knowing what expenses term life insurance can cover is a big move in the right direction, helping to secure your family’s financial future. For parents especially, this information is vital. For that reason, I feature an up-to-date Complete Life Insurance Guide for Parents.
Here at CB Acker Associates, we want to help you take care of your family. If you’re ready to find a policy that fits your needs and your budget, we can help!
With access to all the top rated life insurance companies, we work extra hard to get you the best life insurance rates possible. You can even compare rates and benefits from over 40 providers with no obligation to buy here. Plus, it’s fast—under 60 seconds kind of fast.
Please, give us a call today at 650-969-5844 or email [email protected].