Most of us will pay thousands or even tens of thousands into life insurance policies. All that money spent comes with an implicit trust that when we pass, our spouse or other loved ones will see a payout for all those years we loyally paid premiums.

Unfortunately, that doesn’t always happen. Life insurance companies are notoriously combative and are frequently caught acting in bad faith towards both policyholders and their beneficiaries. Here are five common reasons life insurance companies deny claims, and some tips on how to avoid these problems and what a beneficiary should do if his or her claim is denied.

1. Traveling Overseas and “Dangerous” Hobbies 

Many seniors decide to use their retirement savings and time to travel the world and indulge in their favorite activities. If you are one of these, take note: the questionnaire on your life insurance application probably asked you to disclose travel plans as well as whether you participate in activities insurers consider “high risk,” such as scuba diving or hang gliding. 

Life insurance companies use this questionnaire to judge how much of a risk you are and the higher the risk, the higher the monthly premium you pay. If you didn’t indicate your intention to travel or participate in a high-risk activity and then take out a policy, and something terrible happens, you have just given your insurer a reason not to pay your beneficiaries the life insurance benefit. 

When the claim is denied on this basis, the beneficiary is forced to hire an insurance lawyer to fight it. Then, even if the denial is reversed, any misrepresentation made on that initial questionnaire will cause the premium to be amended retroactively, and the difference between what you paid in premiums and what you should have paid is taken out of your beneficiary’s pay-out.

The bottom line:  disclose all.

2. Suicide

If a policyholder commits suicide within two years of taking out a life insurance policy, a claim will be denied outright as a fraud. The only way for a beneficiary to collect life insurance, in this case, would be to successfully argue that the death was accidental, not suicidal. 

Accidents do happen that bear resemblance to suicide even though the victim had no intent to hurt himself – think cleaning firearms or operating heavy equipment. A lawyer can help with the appeal process in this instance.

After two years, most policies treat suicide like any other cause of death.

3. Lost and Forgotten Life Insurance Policies

When it comes to life insurance, knowledge really is power. If you want to guarantee that your loved ones receive their insurance benefit, arm them with the tools they will need to make a claim long before you expect they will need to make it. 

First and foremost, let them know you have life insurance and that they are beneficiaries! Make sure they know where they can find the paperwork with policy numbers when the time comes and explain the need to present a death certificate.

Granted, it’s not easy to contemplate much less talk about your own death, but if you’ve had the strength to take out life insurance, you also have the strength to discuss it with your loved ones. 

If your beneficiaries don’t know that you have insurance, they won’t know they need to file a claim. Insurance companies aren’t trustees; they have no duty to act in the interest of your beneficiaries. Arm your loved ones with the knowledge and documentation to file their claim when the time comes.

4. Contestability Period Problems

Insurers have the right to investigate any claims made within the first two years of a policy. This “contestability period” combats potential fraud, which in turn keeps policy costs down. 

During the contestability period insurance companies can use any misrepresentation on a life insurance application to deny a claim, even if you just made an honest mistake and that mistake made no difference in your risk. Are you 5ft 8in tall but the application says 5ft 9in? Born on December 27th but the application says December 24th? Claim denied.

As long as the mistake or omission isn’t fraudulent, your beneficiary can have these denials overturned with the help of an insurance attorney. Even if the mistake if not made would have raised your premium due to increased risk, your claim shouldn’t be denied outright. Instead, your lawyer will negotiate with the insurer over what premium payments you should have made while living. The insurer will then deduct the difference between what you paid and what you should have paid from the death benefit and your beneficiaries will receive the remainder.

Know that fraud can invalidate a policy at any time. Don’t do anything that could be considered fraud (for example, hide a terminal illness) when applying for life insurance. Your spouse or children get nothing, even if you are well past the contestability period.

5. Lapsed Policy / Missed Premiums

Insurance companies are increasingly using a single missed monthly payment as a reason not to pay insurance claims. So what happens if you are incapacitated in a hospital before passing and don’t get your bills?

If you pass within a month of a missed payment, your beneficiaries should not have a problem with their claim. Life insurance policies have a grace period, typically 30 days but occasionally longer, from the time a payment is missed to the time coverage lapses. 

There are two ways to succeed with a claim made after a policy has lapsed and the grace period is over:

First, insurance attorneys have successfully argued for a de facto hardship exemption if a long-time client hasn’t been able to pay their bill due to hospitalization or a loss of faculties. In this case, the beneficiaries receive the full value of the policy.

Second, insurance attorneys have also successfully argued that the missed premium payments should be deducted from the final benefit, which the beneficiaries then receive. Many policies include such a provision and even if yours doesn’t, invariably an insurance company will be motivated to settle with your beneficiaries rather than fight a lawsuit. 

To be forewarned is to be forearmed. Use these tips to ensure that your loved ones receive the benefit you intend.

Veronica Baxter is a legal consultant operating out of Philadelphia, Pennsylvania.  She works for Chad G. Boonswang, Esq.

Your use of any financial advice is at your sole discretion and risk. Seniorplanet.org and Older Adults Technology Services makes no claim or promise of any result or success.

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