When taking a new life insurance policy, most of us give a little thought to the possibility that there may be situations where your life insurance policy won’t pay a claim to your heirs. But there are actually such situations – at least five.
Suicide within the first two years of the policy
Life insurance policies typically come with a provision referred to as a period of contestability, and we’ll dive a little deeper into that topic in a moment. But this provision applies more specifically if the death is a result of suicide.
The period of contestability is largely a protection for the life insurance company against people taking out a large amount of life insurance, then committing suicide in order to improve their family’s financial position. Though this action may be unthinkable to most people, it does happen in the real world – or at least it used to, before the introduction of the two year suicide limitation.
Facing a major business failure, the loss of a well-paying career, or exposure to substantial debts, could cause a person to become distraught and hopeless. He may see his own life as being essentially over, but still have a strong desire to provide for his family. We can think of this as a form of benevolent insanity, but it’s a nightmare situation for life insurance companies.
Living abroad
Like any other legal agreement, life insurance policies contain a significant amount of fine print. And like most legal agreements, consumers don’t normally spend much time reading the fine print.
You should.
One of the provisions you might come across in your life insurance policy are exclusions that apply to living abroad. Even if you are living in the US at the time you began your life insurance policy, there may be specific provisions that exclude payment of the death benefit if you are living outside the country.
This is why it’s so important to have a competent insurance broker to guide you through the process of obtaining life insurance. The broker can skim through the fine print, and relate it to you easily and in a way that you can understand.
If you weren’t entirely truthful about your smoking habit
Some people under-report the significance of a smoking habit. If they quit smoking two years ago, they may indicate that they are non-smokers. This produces a substantially better premium rate than a smoker category.
While it’s true that the person may no longer be a smoker, there clearly is a history – one a life insurance company will want to know about. Smoking in particular is one of those habits that can have long-term health consequences. The insurance company will have a time period requirement that will establish at what point a former smoker can be classified as a non-smoker. That may be two years, but it could also be five years or even 10 years. If you under report your smoking status, that can give the insurance company reason to challenge payment of the claim upon your death.
Still another misrepresentation in the smoking category are casual or occasional smokers. Those are people who smoke maybe two or three cigarettes a week, or even monthly bouts of chain-smoking. Because they only smoke occasionally, they may not see themselves as smokers. The insurance company will see it differently.
They will see potential health risks even with a very low level of smoking. If this is revealed upon your death – either from subsequent medical records or from an autopsy – the insurance company may refuse to pay the claim.
The expiration of the term on a term life insurance policy
Most people know when the expiration of their term life insurance policy is coming. But there are times when it can slip your mind. This can easily happen in situations where you have a paid-up life insurance policy. This involves making a sufficiently large payment with life insurance company up front to cover the premiums on the policy for the entire term.
When it happens, there is a possibility that you will forget that the term will come to an end. You may even ignore written notifications from the insurance company, thinking that they are junk mail.
If the term of the policy expires, and you do not extend it, your life insurance coverage will end the day after the last day of the policy. There’ll be no opportunity to revive the policy – for the purpose of paying a death benefit – by attempting to extend the policy after the fact.
Any kind of fraud on the life insurance application
Earlier we discussed the period of contestability provision included in life insurance policies. That provision gives the life insurance company the option to challenge and investigate a claim, typically within the first two years the policy is in force.
The insurance company can use this provision to investigate a suspicious death. They can delay – or ultimately withhold – the payment of the death benefit in the event there are any questionable circumstances surrounding the death.
This is why being completely truthful on a life insurance application is so critical. The insurance company will investigate the cause of death – including events that may have contributed to it – and then match those results against the original application. If a pattern emerges that certain health conditions or dangerous activities have existed back to the time of application – and were not disclosed by the insured – the company can deny payment of the claim.
Unfortunately, even if a person is aware of the two-year restriction, they may still withhold information, or provide inaccurate information, under the assumption that they will certainly be around for at least the first two years. But if they die any time within the two-year period, an investigation may be started that could lead to the denial of the payment of benefits to your family.
