Bearing the loss of a loved one is a heavy burden. Along with the intense emotional fallout, families also face uncertainty about their future.
Lost income and contributions to everyday life can often leave our loved ones in an unmanageable situation. We rely on life insurance to protect those close to us and sustain their well-being. It's why we take time researching and shopping policies and making monthly investments.
After all of the work that's put into this protection, it can be confusing and scary for beneficiaries when life insurance doesn't pay out. When policies factor in hundreds of thousands of dollars, it can put a blinding halt to your plans for the future.
It is rare, as providers only deny a handful of claims each year, but simple mistakes and oversights can be extremely consequential.
If you're concerned about your life insurance plans and the possibility of losing death benefits, this article will detail why companies may deny claims and what you can do to prevent it.
In most cases, if you pay your premiums on time and are honest with your insurance company, your death benefit will pay out.
There are times that insurance companies may deny claims and send denial letters to beneficiaries explaining the decision. Generally, they may void a claim based on how or when you die.
We'll get the obvious out of the way first. When you have term life insurance and the coverage period ends, you'll have to apply for a brand new policy. If you die between policies, there will be no death benefit to pay out.
Likewise, if you fail to pay your monthly premiums, your policy could be closed out. Sometimes this happens because you're in a financial bind, and you don't want to lose benefits. Insurers understand this and often give a grace period of 30-60 days for term policyholders before cancelling their insurance.
Premiums for permanent life insurance plans have more payment options if the owner wants to keep the policy but struggles with payments. If you have cash value built up, or you have dividends in a whole life policy, the insurance company may use those to pay the premium.
If a policy lapses, you may be able to reinstate it without a change in pricing. It's critical to do this quickly, as there is a limited time window to do so, and any changes in your medical history could change your policy.
Although there are times when it's beneficial, you should almost always pursue reinstatement if your policy lapses. It's less expensive, time-consuming, and uncertain than applying for a brand new policy. Make sure your insurance company offers reinstatement, and review the fine print to understand the time period and terms.
There is a contestability period with each new policy that usually lasts two years, though it depends on your location and insurer. During this time, the insurer reviews your application to look for any missing, incomplete, or false information.
People may lie on life insurance applications in the hopes of getting a better rate. If you try to hide any information, such as smoking or drinking habits, your insurance company may find out that you're lying. This is called "material misrepresentation", and it often leads to the insurer denying applications or significantly raising rates.
If you die in the first two years after getting your policy, during the contestability period, the insurance company can review your application information to see if it was accurate. Lying on your insurance policy could be cause for the denial of a claim, even if it had nothing to do with your death.
For example, if you died in a car crash a year after opening your policy, your insurance company will look at your application before paying out. If they find you had high blood pressure, and you didn't tell them, they could still deny your claim.
After the contestability period, the insurer is supposed to pay even if there were small errors on an application. The exception is if it was a blatant lie, which is considered insurance fraud. An example is if you were a smoker and died of lung cancer, but you said you were a non-smoker on your application.
Along with smoking and poor health habits, you need to be open about risky behaviour. Dangerous hobbies, or "avocations", could include scuba diving, rock climbing, or skydiving. If you die while skydiving, but you didn't put that activity on your application, your death benefit may not pay out.
Every insurance company treats risky hobbies differently. Companies may deny your application while others may charge a "flat extra" to cover the added risk, but you won't have issues if you die doing dangerous activities.
If your life involves risky behaviour, and insurance policies are a must, expect your life insurance costs to increase significantly. Fortunately, as you get older, if you stop doing these activities, you can often negotiate the price back down to remove the flat extra.
It's critical to update your insurance policy during major events, like deaths and births, and add secondary beneficiaries. The reason is that if you only have one beneficiary listed and they die before you, there is no clear alternative to receive the death benefit.
If there are no beneficiaries, the death benefit will go to your estate and eventually probate, where the court will decide how it's divvied up. This could leave your family in a bind, as other people may have equal claims to your assets.
This also will likely lower the amount of money your survivors receive. Life insurance death benefits are not taxed, but if it enters probate, the assets are no longer considered part of life insurance but rather a part of your estate. In these cases, the beneficiaries will have to pay taxes on earnings, which could mean they lose thousands of dollars.
Does life insurance cover suicide?
Suicide and life insurance don't seem like a smart mix, especially for the insurer, but, surprisingly, many policies will actually pay out a death benefit if you commit suicide.
There is a catch, however, to protect the insurance company and the policyholder. Policies have a "suicide clause" for the first two years to prevent individuals from taking out life insurance and immediately committing suicide.
If a policyholder commits suicide in the first two years, the death benefit will not pay out. The provider may still return paid premiums or cash value to beneficiaries at the very least.
Since Canada legalized assisted suicide in 2016, pension managers, life insurance providers, and other financial companies have done more to help families. Euthanasia and medically assisted suicide will usually allow a pay out if the policy is older than two years. Follow up with your insurance company to clarify their policies if you have questions about this coverage.
Accidents are covered by life insurance, but accidental overdoses are not always straightforward. If an overdose occurs during the contestability period, for example, the insurer could argue that it was intentional.
A history of drug abuse should be disclosed to your insurer. Coverage options are extremely limited for hard drug abusers. Insurance companies need to see at least a 5-year drug-free span to offer coverage in many cases, and you need to go even longer to get the lowest rates.
Murder is covered in nearly every insurance policy. The only reason your beneficiary will not receive a death benefit is if they are implicated in your murder. If that happens, your life insurance would pay out to the next beneficiary in line.
There are other rare situations that may not be covered. For example, if you die doing something illegal, like robbing a house, your death benefit will not pay out.
An even more rare denial comes from an "act of war" exclusion. This detail can result in claims denials if you die in a high-risk area or warzone.
Soldiers who die in combat will still be covered, but journalists and travelers may risk their death benefits in these places. In general, just living outside of the country where you opened the policy could result in a death benefit denial! If you are planning to travel or move abroad, it is essential to review your plan details to make sure you are covered.
Many permanent life insurance plans offer options and riders to use your death benefit before you die. For example, if you have health issues and need help paying for long-term care, you can dip into your cash value or death benefit to pay for them.
Keep in mind, if you use your death benefit while you're alive, your beneficiaries won't have anything left. Check the terms of your plan to see how you can take out loans or payouts early.
There are many reasons life insurance won't pay out. If you're honest with your insurance company and your beneficiaries and pay your premiums on time, you can avoid most, if not all, of the problems that could possibly arise.
When life insurance doesn't pay out, you can also appeal the decision directly with the provider or work with an attorney. Denials are rarely overturned, but if you have a legitimate complaint and evidence, you can seek help to contest it.
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