Imagine you and your partner purchase life insurance policies. You both fill out your applications accurately and to the best of your knowledge. You both pay your premiums on time.
But then your partner passes away and your claim as the beneficiary is denied – what could cause the life insurance company to reject your claim?
It turns out there are four main reasons for life insurance claims to be rejected. All of the main reasons will be discussed in this article. But first, let’s take a closer look at some life insurance essentials; specifically, the important time period known as the life insurance contestability period.
What You Need to Know About Life Insurance
There are two main types of life insurance – whole life and term life.
Whole life insurance gains cash value as time goes by and premiums are paid. This feature offers a number of benefits; for example, you may be able to borrow against your policy or take cash out in an emergency.
Term life insurance does not gain cash value. It offers a set dollar amount, or death benefit, in exchange for a lower premium than whole life insurance. Term life is also only valid for a specific period of time. Most term life insurance is set for a certain number of years – such as 25 or 30 – or until a certain age is reached, like 60 or 70.
Both types of insurance have a contestability period which usually lasts for the first one or two years of the policy. During the life insurance contestability period, companies can investigate claims and possibly deny them.
That means if a person dies within the contestability period then there is more likely to be a claim denial.
What Are the Main Reasons Why Life Insurance Claims Are Denied?
Claim Denial Reason #1 – Unpaid Premiums
This reason for rejecting a claim is pretty straightforward and typically well understood by those purchasing life insurance policies.
Basically, if you stop paying on your regular premiums then the policy lapses and the full death benefit is not paid. Depending on the type of policy, the insured may get back a percentage of the benefit or the premiums paid if it lapses, but this is not always the case.
There is another key thing to keep in mind here when buying life insurance:
There is a type of insurance that can ensure a policy can’t be canceled. This type of policy is called “no-lapse guarantee life insurance.”
What is No-lapse Guarantee Life Insurance?
This type of policy guarantees that as long as the premiums are paid on time a death benefit will be paid. In other words, the company cannot cancel the policy for any reason, even if the cash value reaches zero.
With no-lapse guarantee life insurance you make sure that you have permanent life insurance protection and permanent tax-deferred access to any cash value that builds up.
Claim Denial Reason #2 – Suicide Within the Contestability Period
If the insured commits suicide during the first year or two of a policy then a life insurance company may deny the claim. Most companies provide the full death benefit in cases of suicide after those first two years have been completed, but not all do.
Claim Denial Reason #3 – Murder by a Beneficiary
If it is found that a life insurance beneficiary murdered the policy holder the insurance company will deny their death benefit claim. While this is a rare scenario, it still does occur and would lead to a rejection of the life insurance claim.
Claim Denial Reason #4 – Material Misrepresentation
This is the reason that most life insurance holders and beneficiaries will need to worry about.
Material misrepresentation occurs when a person knowingly provides false information or simply fails to disclose important information, which can then result in the death benefit claim being denied.
Again, this mainly applies to deaths within the one- to two-year contestability period but in some states and some instances, if the material misrepresentation was severe, it could go beyond that time window.
So what exactly makes up material misrepresentation?
Some prime examples include failing to disclose a smoking habit or not revealing a pre-existing physical condition. Other material misrepresentations could include giving an incorrect age, not being honest about previous arrests, and more.
Again, it is up to the insurance company to investigate misrepresentation during the contestability period. However, to avoid a denial that could affect your loved ones it is best to be extremely cautious when applying for life insurance.
Here Are 3 Tips to Avoid Life Insurance Claim Rejection
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Never misrepresent yourself.
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If you smoke a cigarette a day, say so on your application. If you have been diagnosed with a heart condition, be sure to put that on your application as well. Be accurate and detailed with the information you provide.
You should also take your time when filling out the application so that you don’t make any mistakes. Go slow and answer all the questions to the absolute best of your knowledge.
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What if you have questions?
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Ask the insurance agent any questions you may have and don’t leave anything up to chance. The agent can guide you through the process and, remember, they want your business. These agents can help you with the best way to answer questions and explain things that may be confusing to you.
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Review your application carefully.
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Once you have answered all the questions don’t rush to submit your application. Set it aside for a day and then come back to it with fresh eyes and read it through again to make sure you have provided the necessary information and not left out anything important. By being accurate and detailed with your information you can also help your loved ones avoid the stress of going through someone contesting a life insurance beneficiary claim. The more detailed you are, the less room for contestability.
Take the Time to Get it Right
Life insurance is something that is very important to many people. It can allow you to financially protect your loved ones following an unfortunate passing.
For these reasons, you need to be deliberate and thoughtful when applying for life insurance. Make sure you provide every piece of important information. It’s often better to go overboard than to risk leaving things out on your claim or application.
If you do so then you can rest easy knowing that your loved ones will receive the money they need when you are gone. You’ll help them avoid going through a claim rejection process or the expense of hiring a lawyer.
The good news is life insurance claim denials are rare – experts say that less than 1% of all life insurance claims are rejected.
By following the tips in this article, you can help ensure that your beneficiaries are not in that 1% who must go through the stress and disappointment of having a life insurance payout denied.
Featured Image: Megapixl
