It’s a common fear – what if my life insurance company decides not to pay out the death benefit to my next of kin? Life insurance is the rare financial product where 1) you never want to actually use it and 2) if it ever becomes necessary, you won’t be around to make sure everything goes smoothly.
You can rest your fears. Your life insurance policy is a contract, and the insurance company is legally bound to fulfill that contract.
Unlike some types of insurance where you file a claim that must then be reviewed and approved or rejected, life insurance is more straightforward. If there’s a death certificate, then the benefit is paid.
That said, there are two times when the death benefit could be withheld or reduced.
The first is during your policy’s "contestability period," which usually lasts for the first two years that your policy is in force. During the contestability period, your life insurance company has the right to investigate the accuracy of your application.
Insurers can investigate your application no matter how you died. Let’s explore a hypothetically situation. Say you’re a frequent diver and you didn’t tell your insurance company, and then you die because of an unrelated health issue. Your life insurance company could still investigate and find that you lied about your diving. You might think, Well, me lying about my diving had nothing to with how I hypothetically died! Doesn’t matter – the fact that you (hypothetically) misrepresented yourself is enough for the life insurance company to deny your beneficiary’s claim.
That doesn’t mean they will, however. They could still pay out some money, depending on how, exactly, you misrepresented yourself. For example, let’s say you put on your application that you’re an occasional diver, when in fact, you should be categorized as a frequent diver. The insurer may just recalculate how much your premium should have been and deduct what is owed from your death benefit.
The life insurance company won’t always investigate – if you die in a car accident, for example. But if you die of lung cancer and didn’t mention any smoking habits on the application, they’ll probably investigate that.
The only other situation where a life insurance company will not pay out the death benefit is if the policyholder commits suicide within the first two years. This is known as the "suicide clause" and is separate from the contestability period. In this situation, the life insurance company will return the premiums already paid. The suicide clause does not apply to policyholders who commit suicide after the first two years.
If your beneficiaries have their claim denied, and they feel that the decision is wrong, they can sue the life insurance company. There are lawyers who specialize in life insurance claims and denials. They will be your beneficiary’s best resource in this situation.
Want to help the claim process move more smoothly for your beneficiary? Make sure they know about the existence of your life insurance policy before anything happens to you. They should also either have a copy or know where a physical copy is.
Image: Andy Withers