Reasons Your Life Insurance Won’t Pay Out

Life insurance is a good way to provide a safety net to your family. The payout can be used to pay off debt (like a mortgage or student loans), fund a funeral or provide an inheritance.

While life insurance can provide peace of mind, you might wonder how often life insurance claims get denied and leave beneficiaries empty-handed. It’s an awful thought, but not something you should worry much about. That’s because very few life insurance claims are actually denied.

“Life insurers pay the vast majority of claims made,” says Whit Cornman, a spokesperson for the American Council of Life Insurers (ACLI), an industry group. Cornman notes that less than 0.5% of claims (measured by policy face amount) were in dispute at year-end 2019.

While the odds of a life insurance claim denial are extremely small, you should still be aware of what can land a claim in disputed territory.

Failure to Disclose a Medical Condition or Other Pertinent Information

When you apply for a life insurance policy, you are obligated to disclose any medical conditions and other potential risk factors, such as dangerous hobbies (like skydiving). If you fail to give accurate information during the application process, the life insurance claim could be denied later. That’s because life expectancy (called mortality in the industry) is the basis for determining your life insurance underwriting class. Medical conditions are important factors that determine rates.

A failure to disclose pertinent information during the life insurance application process is considered a “material misrepresentation.” This means a false or misleading statement or an omission of information. A material misrepresentation affects the insurer’s ability to charge accurate rates. In some cases, a misrepresentation means an application is approved that otherwise would have been denied.

Here are some examples of information you are typically required to disclose on a life insurance application:

• Medical history. This includes current health conditions, mental health conditions, prescription history and family health history (parents and siblings).
• Risky hobbies. This includes activities like car racing, mountain climbing and skydiving.
• Risky behaviors. This includes tobacco use, criminal records and dangerous driving behaviors such as DUI convictions or other traffic violations.
• Dangerous occupations. Construction workers, active military personnel, firefighters, law enforcement and pilots can face higher life insurance rates.

Life insurance policies have what’s called a “contestability period,” which is typically a two-year window when the life insurance company has the right to question or contest a claim. The two-year period begins on the issue date of the policy.

The insurer might request medical records and other documents to evaluate them for any evidence of material misrepresentation on the life insurance application.

If your insurer finds evidence of material misrepresentation, the policy could be voided and your beneficiary would not receive a death benefit.

Note that insurance companies have many ways to verify the personal data you provide on an application.

Life Insurance Premiums Were Not Paid

In some cases beneficiaries could try to make a claim without realizing that you didn’t pay your premiums before death.

If you’re currently behind on your life insurance payments, you may be able to rectify the situation, depending on how far behind you are. Most life insurance policies have a 30- or 31-day grace period after the due date. You can make up the payment without being charged interest. If you pass away within the grace period, your beneficiary still gets the death benefit, minus the past-due premium.

If the policy has lapsed due to non-payment, you may be able to reinstate the lapsed life insurance by paying your past due premium with interest. The rules for reinstating a policy will vary by company and state. For example, in Texas, most life insurance companies will let you reinstate your policy within a five year period, but you have to answer more health questions or take another life insurance medical exam.

Outliving a Term Life Insurance Policy

If you have term life insurance, you could potentially outlive the policy’s term, meaning there would be no death benefit payout.

If you need longer coverage, the policy might allow you to renew (at a higher price) when you reach the end of the term. You may also be able to convert a term life policy to a permanent life insurance policy, but there’s a time window to do it. Make sure you know your policy’s deadline if you’re interested in converting it.

A Death by Suicide

Life insurance policies usually have what’s known as a “suicide clause,” usually lasting two years. If a suicide occurs during this time, the insurance company will typically not a make a payout. Instead, it will refund the premiums to the beneficiary.

Making a Life Insurance Claim

To ensure a smooth claims process, it’s important to let your beneficiaries know where your life insurance policy is located, says Cornman at the ACLI.

He recommends keeping the policy with other financial records, legal papers or anywhere your beneficiaries are likely to look if they need to file a claim. Cornman adds that you should keep your life insurance agent’s name and contact information easily accessible.

If you are a beneficiary, here’s how to make a life insurance claim.

If the life insurance claim is denied, beneficiaries should ask for a claim denial in writing. If they want to appeal the decision, they should gather the necessary documents and information to support the claim. If they can’t resolve the dispute with the insurer, they should contact the state’s department of insurance for further guidance.