Life insurance is the only type of coverage where the policyholder won’t ever know if it works. Benefits are paid upon death, and you don’t want the fine print to leave your loved ones stuck scrambling when you thought you had them well taken care of.
This concern is why it’s essential to watch for policy exclusions, where a life insurance policy may not pay out as it was intended. Each insurance carrier’s policy exclusions vary, but this guide walks you through some common things your life insurance policy might not cover. (For more detailed information, read this article by OJM Group.)
1. Misrepresentation or Fraud
When you take out a life insurance policy, there are specific details you attest to as true. Most policies cover the insurer’s rights to investigate after a death during a contestability period. If the insurance company suspects the policyholder of fraud or misrepresentation, it can delay benefit payout during the contestability period while it investigates.
The investigation focuses on two main parts: material misrepresentation and fraud.
The first category is the most common reason claims are denied after being investigated. Misrepresentation occurs when the person taking out the policy withholds or falsifies information that would have been important for the insurer to know before determining the premium or approving the policy. Omitting pre-existing conditions from the medical history, hiding behaviors like using tobacco or drugs, or lying about their finances are examples of misrepresentation.
On the other hand, fraud is a deliberate act in which the policyholder, beneficiary, or someone else acts deceptively to obtain money from the insurance policy. Fraud could involve lying on the application, staging a death, or faking an identity to collect the death benefits.
2. Suicide or the “Slayer Rule”
Suicide clauses are standard issue in the majority of life insurance policies. They’re designed to limit the payout if the policyholder’s death is deemed suicide, and the policy was taken out 1-2 years before the death occurred. In those situations, the insurance company may deny the payout entirely or refund the premiums paid.
A lesser-known exclusion is known as the “slayer rule.” This clause prohibits someone from murdering a beneficiary and receiving payouts. Instead, the payout is provided to a contingent beneficiary or the estate.
3. Policy Lapses or Beneficiary Issues
Insurance companies have the right to deny a death benefit request if the premiums are overdue. Payments not made on time cause the policy to lapse, so it isn’t in effect until the next premium is paid. Most policies offer a grace period.
The policy is void if the premium isn’t paid by the end of this period. However, if the death occurs during the grace period, the carrier may still be required to pay the benefits, depending on whether they sent timely lapse notices and fulfilled their obligations to notify the policyholder of their intent to cancel.
Disputes also happen if there is no living beneficiary. Every policyholder is required to assign a beneficiary to their insurance. If this person passes away before the insured and there is no contingent beneficiary, the death benefit is typically passed to the estate, which then undergoes the probate process before being disbursed.
4. Excluded Activities
Death caused by specific activities may be excluded. If you don’t know what these behaviors are, you may engage in them and unwittingly risk your family’s financial future.
Participation in what are considered “high-risk activities,” such as car racing, sky diving, or mountain climbing, can lead to a death that voids your life insurance. Certain professions considered dangerous can also fall under this category. Police officers, construction workers, pilots, and other higher-risk job workers may have higher premiums or struggle to obtain life insurance altogether. If you’ve switched careers and didn’t let your insurer know, it could void your insurance contract.
Deaths that occur due to participation in illegal activities are typically excluded, too. If the policyholder was engaging in a crime or an unlawful act, their death benefits may be forfeited.
Other policies include exclusions for deaths that resulted from military service or an act of war.
5. Standard Death on an Accidental Death Policy
A final way your insurance may not pay out as expected after a death is if you had an accidental death policy instead of a standard contract. Accidental Death and Dismemberment (AD&D) policies are common because they’re easy to get approved for and are cheaper than standard policies.
This ease of access is because they only cover the policyholder if they pass due to a qualifying accident. AD&D policies are not valid if the death was from natural causes, an illness, or a self-inflicted injury.
Standard life insurance policies cover death that happens from any cause other than those listed above as exclusions.
Conclusion
We all want to make sure our loved ones aren’t left in a financial bind when we pass, and life insurance is our peace of mind that this doesn’t happen. But if you aren’t aware of the exclusions in your policy, you could inadvertently void your death benefit.
Check your policy’s fine print and talk to your agent to ensure these issues don’t apply to you. To protect your assets more thoroughly and minimize the stresses of inheritance on your beneficiaries, consult with your financial advisor.