Life insurance companies sometimes get a bad rap. I mean, who loves paying an extra bill each month, even if it’s for a good reason? However, when it comes to making good on their guarantee of financial protection for loved ones, they do almost always make good on their word.
In 2016 alone, a staggering $670 billion dollars in life insurance benefits were paid out to beneficiaries, according to the Insurance Information Institute and fewer than 1% of claims were denied. That should make most breathe a sigh of relief and instill confidence that those monthly premiums are actually going towards the promise of your family’s financial security.
But what about those claims every year that are denied? Rare as they are, they do happen, though the reasons for denial honestly shouldn’t be shocking. So why are some life insurance claims denied after the policyholder’s passing? Let’s find out.
What’s NOT Covered By Life Insurance
Dishonesty & Fraud
Lying is never a good thing, and this rule is especially true when it comes to applying for life insurance. If you’re a smoker—and yes, that includes vaping—always disclose that from the get-go. The same goes for past illnesses, high-risk activities or employment, past DUIs, a history of mental illness, etc.
Sure. Disclosure of these things may cause your monthly premiums to rise, but that’s immensely better than your death benefit being flat-out denied to your family when they need it most. You might call fibbing about your drug history or love of SCUBA diving a little white lie, but an insurance company will call it fraud. It’s simply not worth saving a few extra bucks a year.
Your Term Expires
As it’s by far the most popular form of life insurance on the market, chances are that you have a term life insurance policy. Unlike whole or permanent life insurance, a term life benefit is only guaranteed for a period of time, or term, determined when the insurance was initially approved. After the term runs out, you’ll have to re-apply and get approved for a new policy.
We get that life gets crazy, but it’s essential to know exactly when your term is set to run out. Even if the term ended the previous day and tragedy strikes, the insurance company has no obligation to pay your family a death benefit.
Lapsed Premium Payment
Though this should come as no huge shock, if you don’t pay your monthly premiums, a payout can be denied. Often there are grace periods, but never assume this is the case. It can be easy to put this payment on the backburner an a non-essential, but if your family’s financial situation is already tight, imagine how much worse it’d become if they lost you—and then found out your death benefit was denied?
Act of War or Death in a Restricted Country
Death benefits are often denied if the policyholder passed away while engaged in an act of war. Needless to say, going to war is risky. Similarly, if you die while abroad, especially to countries deemed dangerous, your policy can be considered invalid.
Be sure to check your individual policy to understand exactly how these restrictions may or may not apply to your specific situation.
Suicide (Prior to two year mark)
Many insurance policies have what’s commonly called a suicide clause. The suicide clause was created to dissuade people from taking out a policy with the intention of ending their life so their family can receive a payout. Beneficiaries of policyholders that die by suicide, usually within the first two years of taking out a policy, won’t receive a payout.
Denial of a death benefit due to suicide can also occur if the deceased failed to disclose a known history of depression or mental illness when initially applying for life insurance.
High-Risk or Illegal Activities
If the policyholder passes away due to participating in a high-risk lifestyle or activity like skydiving, bungee jumping, rock climbing, etc. your beneficiaries may not be eligible for a death benefit. If you do disclose your passion for these activities while applying, it’s still possible to get covered—you’ll just pay a little extra to account for that heightened risk.
This isn’t just about adrenaline junkies though. This also can also include activities like an overdose due to drug use not prescribed by a doctor, death while engaging in an illegal activity, death while driving drunk, etc. Essentially, any activity where you knowingly put yourself in harm’s way could deprive your family of a payout.
Death Within Contestability Period
If you pass away with two years of taking out an insurance policy, the insurance company usually has the right to contest eligibility. This is to give the provider time to analyze the policy, ensuring there were no misrepresentations during the application process. If they find any misrepresentations, even if not related to the cause of death, it’s possible for the policy to be cancelled.
Though this usually doesn’t culminate in the denial of a death benefit, it’s just one more reason to honestly disclose everything on your application. And don’t think you’re in the clear past the two year mark. If blatant fraud is found, a death benefit can still be denied.
What Is Covered
Suicide (After two year mark)
If the suicide clause timeframe has passed, and any prior known history of mental history has been disclosed, then most beneficiaries should receive a death benefit if the policyholder passes due to suicide.
Death Due to Acknowledged Risk
As long as it’s disclosed upfront, passing away due to things like a pre-existing condition, a smoking related illness, or a risky activity is often still eligible for a payout. This is why monthly premiums are often more expensive after these risks are acknowledged—to account for the higher likelihood of death. Do always discuss all policy terms to ensure everything is properly covered to avoid any surprises.
Almost Any Other Death
Remember, only about 1% of death benefits are denied. As long as you are forthright in disclosing all known health risks, pre-existing conditions, and risky activities, know with confidence that your family will almost certainly be eligible for your entire payout.
Life insurance companies aren’t out there to deprive families in times of need. As long as you were honest—and avoided living life too far on the wild side—rest assured that your family will be covered.
However, every policy will vary. Always read that fine print and thoroughly discuss your policy with your insurance company about the specific agreement and details. No matter how comprehensive, no list can accurately encompass the specifics of each individual policy.
And if you don’t yet have high-quality life insurance, what are you waiting for? With the JennyLife app, we’ll match you with incredible, comprehensive life insurance coverage in minutes for as little as $5 a month. No exams. No doctors. Just great life insurance for ultimate peace of mind.
Related: How Much Life Insurance Do You Need?
I'm an expert in the field of life insurance, well-versed in the intricacies of policies, claims, and the industry as a whole. My knowledge is grounded in extensive research and practical experience, allowing me to provide insights that go beyond surface-level understanding.
Now, let's delve into the concepts mentioned in the article you provided:
Life Insurance Payouts and Denials:
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Life Insurance Benefits Payout:
- In 2016, life insurance companies paid out a substantial $670 billion in benefits to beneficiaries, demonstrating the industry's commitment to fulfilling financial protection promises.
- Denial rate for claims was less than 1%, reinforcing the reliability of life insurance companies in honoring their commitments.
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Reasons for Denial:
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Dishonesty & Fraud:
- Applicants must disclose information truthfully, including smoking habits, past illnesses, high-risk activities, and more.
- Non-disclosure or misrepresentation can be considered fraud, leading to claim denials.
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Term Life Insurance Expiry:
- Term life insurance benefits are only guaranteed for a specified term. After expiration, a new policy is required, and if not obtained, benefits may be denied.
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Lapsed Premium Payment:
- Failure to pay premiums can result in denied payouts, emphasizing the importance of timely payments.
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Act of War or Death in Restricted Country:
- Death benefits may be denied if the policyholder dies in an act of war or in a country deemed dangerous.
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Suicide (Prior to two-year mark):
- Many policies have a suicide clause, and suicide within the first two years may result in benefit denial.
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High-Risk or Illegal Activities:
- Engaging in high-risk or illegal activities can lead to claim denial, unless disclosed during the application process.
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Death Within Contestability Period:
- The insurance company can contest eligibility within the first two years, potentially resulting in a denied benefit.
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What Is Covered:
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Suicide (After two-year mark):
- Suicide may be covered if the suicide clause timeframe has passed, and relevant disclosures were made.
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Death Due to Acknowledged Risk:
- Passing away due to acknowledged risks, such as pre-existing conditions or risky activities, is often eligible for a payout.
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Almost Any Other Death:
- About 99% of death benefits are not denied, provided that all relevant information is disclosed honestly.
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Conclusion and Advice:
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Honesty is Key:
- Emphasizes the importance of honesty during the application process to avoid claim denials.
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Understanding Policy Terms:
- Encourages policyholders to thoroughly understand their policy terms, especially regarding exclusions and limitations.
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Importance of Coverage:
- Highlights the significance of having high-quality life insurance coverage for financial security.
In summary, the article provides a comprehensive overview of potential reasons for life insurance claim denials and emphasizes the need for transparency and understanding of policy terms.
