What Is And What's Not Covered Under Life Insurance

A life insurance policy is a contract between you (the policyholder) and an insurance company. In exchange for paying regular premiums, the insurance company pays a death benefit to your beneficiaries if you die. Life insurance coverage provides a financial safety net, and it could replace your wages or be used to pay off the mortgage or college costs for the kids. 

A: What Does Life Insurance Covers - if you die due to natural causes, an illness, or an accident, your designated beneficiaries will get the life insurance payout. Here's a quick rundown of the types of deaths that are covered under life insurance policies:

1: Natural Causes - Life insurance covers death due to natural causes. If you die of a heart attack, cancer, an infection, kidney failure, stroke, old age, or some other natural cause, your beneficiaries will receive the insurance payout.

2: Accidents - Your life insurance policy will pay out death benefits to your beneficiaries if you die from a motor vehicle accident, drowning, poisoning, accidental drug overdose, or another tragedy.

3: Murder - The death benefit will be paid to your beneficiaries if you are murdered—unless your beneficiary murdered you or is closely tied to your murder.

4: Suicide - Life insurance covers suicide, and your beneficiaries will receive the death benefit unless the death occurs during the "contestability period"—typically the first two years of the policy—provided there's no other exclusion in the policy that forbids it.

5: Pandemic Illness - If you have an existing policy and die of COVID-19, it's categorized as a natural cause, and the insurance company will pay out the benefit to your beneficiaries. However, suppose you buy a new policy during an ongoing pandemic and lie on your application about your health or exposure to the illness. In that case, the insurer can refuse to pay out.

B: Which Types of Deaths Are Not Covered by Life Insurance - If you don't die due to one of the reasons mentioned above, your insurer may not pay the death benefit to your beneficiaries. Here are the situations when your beneficiaries may be unable to collect benefits:

1: Risky Activities - Depending on the situation and your policy, you may not be covered if you die while participating in a risky activity. Risky activities are recreational pursuits that have an increased potential for injury or death, such as:

Scuba diving
BASE jumping
Hang gliding
Auto racing
Aviation
Rock and mountain climbing

The risky activities category also includes some jobs, such as working as a logger, pilot, offshore oil rig worker, offshore fisherman, and underground miner.

If you participate in risky activities, whether for fun or work, you can still buy a life insurance policy—but you might end up paying higher premiums. And, depending on how risky the activity is, your insurer may add an exclusion to the policy that prohibits payments if you die while engaged in that activity.

If you engage in any risky activities, tell your insurer during the application process. Otherwise, your insurer can cancel your policy or refuse to pay out the death benefit.

2: Murder - Under the "Slayer Rule," if your beneficiary murders you—or is somehow tied to your murder—they will not receive the death benefit.2 Instead, your insurer will pay out the death benefit to your contingent beneficiaries or to your estate.

3: Suicide - In general, life insurance covers suicide. However, most policies have a "suicide clause"—or contestability period—during the policy's first two years. Life insurance policies won't cover a suicide that occurs during this period. Things can get tricky if a policyholder dies of a drug overdose during this time. However, in this case, the insurer would need to prove the overdose was intentional to withhold the death benefit.

4: Other Reasons Life Insurance Won't Pay Out - If you lie on the application. Life insurance companies can withhold death benefits if you lie on your application (that's insurance fraud, by the way). For example, the insurer can cancel your policy, and your beneficiaries would lose out on benefits, if you lie about your:

Family health history
Medical conditions
Alcohol and drug use
Risky activities
Travel plans

5: Not naming a beneficiary (or they predecease you) - The death benefit payout gets complicated if you don't have designated beneficiaries—or if you do and they predecease you. In these situations, the death benefit goes to your estate and not necessarily to your loved ones. It's essential to designate primary and contingent beneficiaries to receive the insurance death benefit in the event of your untimely death. Otherwise, the benefits are subject to probate, and they ultimately may not end up where you intended.

The Bottom Line - Life insurance can provide peace of mind and a valuable financial safety net for your loved ones. In general, policies cover deaths due to natural causes, illness, and accidents. Still, insurers can withhold benefits in certain situations. Be sure to read your policy's fine print to understand what's covered—and what is not.