1. Suicide
A common circumstance in which a life insurance policy will not pay out is in the case of suicide. Depending on what state you live in, there could be a suicide clause in your policy. If there is such a clause, and if you were to commit suicide within the specified time frame, your beneficiary would only get the premiums back, not the death benefit.
This suicide clause is an incontestability clause, a window of time during which the insurance company can investigate and deny claims. The period is usually one to two years in most states, and it begins as soon as the insurance policy goes into effect.
The clause protects life insurance companies from people who would take out a large policy and then commit suicide for the “betterment” of their family’s financial situation. The thought of doing something like that might seem bizarre to most people, but before the incontestability “suicide clause” went into effect it occurred more often than you might think.
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2. Withholding Information On The Application
The insurance company is going to investigate the cause of your death when a claim arises within the first 2 years of the date of issue. You can be sure of that. The first 2 years are called the contestability period.
It will look at the events that led to your death and compare them against your original application. If the company finds that you were less than forthright, or if you somehow forgot to mention that you have a health condition or you were involved in dangerous activities all the way back to the time you applied for coverage and you didn’t mention them, it can deny payment on the claim.
In order for a life insurance company to deny a claim, the misrepresented information must be considered “material”.
Information is a “material representation” if it would have caused the insurer to change the terms of the policy with different premiums, or have been unwilling to issue it in the first place.
If an investigation finds you misrepresented facts on your application, the insurer has a couple of options.
- It can figure out how much premium you should have been paying based on the new facts and reduce the death benefit by that amount.
- Or the insurance company can deny the claim.
How the situation is handled depends on the state laws, the size of the claim, and the severity of the misrepresentation.
Each state has its own laws about the incontestability clause, so a claim could be denied due to a material misrepresentation whether there was intent to deceive or not. In most states, a policy can be voided even if the material misrepresentation has no connection with the cause of death.
In Nationwide v. Nelson, the insured had been convicted of a felony but answered the question on the application that he had not. The defendant insisted that it was not a deliberate attempt to mislead the insurer, but the court ruled that intentional misrepresentation is not required to void the policy.
In Meadlock v. American Family Life Assurance Company of Columbus, the insured failed to disclose heart issues on the application and subsequently died of ventricular fibrillation. The insurer refused to pay, citing material misrepresentations.
3. Dangerous Activities
You may have heard of professional athletes having a certain clause in their contract that does not allow them to participate in what are considered dangerous activities. That could be something fairly obvious, like skydiving, or even something far more common, such as riding a motorcycle.
The same applies to a life insurance policy. Think about it. Life insurance is all about risk management. If you are jumping out of an airplane with a parachute (that may or may not work) on your back, you’re a higher-risk applicant than someone who doesn’t engage in that kind of activity. It’s best to be honest about your risky hobbies or lifestyle when asked. If you are actively involved in one of the dangerous activities listed on the application, you can still do it, but you will need to pay to be protected.
4. Illegal Activities
This goes back to that earlier statement about common sense. If you die while committing a crime or participating in an illegal activity, the life insurance company can refuse to make a payment. For example, if you are killed while stealing a car, your beneficiary won’t be paid.
Okay. That one’s fairly obvious. But this next point might surprise you. What if you’re doing something illegal and you don’t even realize it? Maybe you’re walking on private property. Trespassing is a crime, even if you don’t know you’re trespassing. Let’s say you’re being chased by a big dog, and you have a heart attack and die. If it turns out that you were trespassing, your claim could be denied.
5. Act of War
Some life insurance policies have an Act of War exclusion. It’s not designed to exclude soldiers. Rather, it’s in place to deny claims for civilians who are killed in wars or by acts of war, such as journalists whose job takes them into the midst of battle on a regular basis, or people who travel to regions of the world where there’s armed conflict.
6. Living Outside of the United States
Here’s one you may not have considered. Let’s say you take out a life insurance policy while you’re living in the United States, and then you move to another country.
There could be a clause in the policy that excludes the payment of a death benefit if you are not living in the U.S. at the time of your death. Be sure to look for any mention of this in your contract, especially if you see yourself leaving the U.S. in the near future.
7. Fraud
When a death claim occurs after the 2 year contestability period, the insurance company must prove fraud to deny a claim.
Insurance fraud is a “specific” intent crime. This means the prosecutor must prove that the person involved knowingly committed an act to defraud.
Life insurance is a type of contract, and with all contracts, fraud can void the entire agreement.
If you provide material misrepresentations with the intent to defraud or to facilitate fraud, you may also be guilty of insurance fraud, which is a crime.
8. No Insurable Interest
In the field of personal insurance, one is held to have an unlimited interest in one’s own life. “Insurable interest” must exist at the time of the contract. Continued insurable interest, however, need not be demonstrated. A divorced woman may continue life insurance on the life of her former husband and legitimately collect the proceeds upon his death even though she is no longer his wife.
For someone to purchase an insurance policy on your life and be considered the beneficiary (making them beneficiary-owner), they must be able to demonstrate an insurable interest. Do note that even with an insurable interest, anyone who wants to insure your life would also require your consent before a policy could be issued. There are some exceptions, such as a parent buying coverage for a minor child.
Insurable interest examples:
1. In the case of individuals related closely by blood or by law, a substantial interest is engendered by love and affection.
2. In the case of other persons, a lawful and substantial economic interest in having the life, health or bodily safety of the individual insured continue, as distinguished from an interest which would arise only by, or would be enhanced in value by, the death, disablement or injury of the individual insured.
3. An individual party to a contract or option for the purchase or sale of an interest in a business partnership or firm, or of shares of stock of a closed corporation or of an interest in the shares, has an insurable interest in the life of each individual party to the contract and for the purposes of the contract only, in addition to any insurable interest which may otherwise exist as to the life of the individual.
4. A charitable organization as provided in section 501(c)(3) of the internal revenue code, which has a policy ownership interest has an insurable interest in the life of each proposed insured who joins with the charitable organization in applying for a life insurance policy naming the charitable organization as owner and irrevocable beneficiary.
If a life insurance policy lacks an insurable interest at inception, it is voidable It, therefore, follows that if no insurance policy ever legally came into effect, then neither did any of its provisions, including the statutorily required incontestability clause. The incontestable clause is no less a part of the contract than any other provision of it. As a result, the incontestability provision does not bar an insurer from asserting a claim on the basis of a lack of insurable interest after the incontestability period expires.2
9. Policy Replacement
If you do replace existing coverage, the new policy may contain new suicide and contestable periods. The following would be considered replacement: you stop paying premiums on an existing policy or surrender an existing policy before or shortly after applying to us or you borrow from an existing policy to pay premiums for the insurance for which you are applying. State law may define replacement to include other situations.
Read the fine print and get insured with confidence
By no means is this a comprehensive list of reasons life insurance won’t pay. These are, however, some of the more common instances.
Bottom line? Be completely honest, and don’t ignore the fine print on your life insurance policy. You don’t want to be responsible for losing the benefits of that policy because you “didn’t know” or because you thought you could get away with something by not being 100% truthful. The best advice is to be sure to read your entire insurance contract, including and especially the fine print, before you sign it.
If you’re unsure of anything, just ask. That’s what our claims specialist is for, to guide and direct you to the insurance policy that’s best for you. They will read the fine print with you and help you understand what it all means, especially as it pertains to your particular situation.
To talk with our experienced Life Insurance Lawyer, contact our preferred life insurance claims specialist.
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FAQ’s
Reasons life insurance won’t payout?
- Suicide
- Smoking, or another health-related issue
- Dangerous activities
- Illegal activities
- Act of war
- Living outside of the United States
- Fraud
- No Insurable Interest
- Replacement
Does life insurance pay for suicidal death?
Depending on what state you live in, there could be a suicide clause in your policy. If there is such a clause, and if you were to commit suicide within the specified time frame, your beneficiary would only get the premiums back, not the death benefit.
This suicide clause is an incontestability clause, a window of time during which the insurance company can investigate and deny claims. The period is usually one to two years in most states, and it begins as soon as the insurance policy goes into effect.
How long do you have to have life insurance before you die?
It depends. If it is a term, universal or whole life policy it is same-day coverage once it is in force. If it is a guaranteed issue policy, it can be up to 2 years.
References
- http://www.insurance.ca.gov/01-consumers/105-type/95-guides/15-gen/insur-fraud-is-felony.cfm
- https://www.opic.texas.gov/life-insurance/rights/
- https://content.naic.org/sites/default/files/inline-files/JIR-ZA-34-03-EL.pdf
- https://www.supremecourt.gov/DocketPDF/18/18-7709/86616/20190205152949620_00000012.pdf
- https://courts.delaware.gov/opinions/download.aspx?ID=160700
- https://casetext.com/case/meadlock-v-am-family-life-assurance-co-of-columbus
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