5 Hidden Risks That Could Void Your Life Insurance Claim

Life insurance can protect your dependents from decades of financial struggle, but what if it doesn’t pay out? You need to avoid the worst mistakes and oversights that can lead to denied life insurance claims.

In this life insurance guide, we will go over the 5 hidden risks that can lead to rejected claims and how to avoid them.

Risk #1: Failure to Disclose Pre-Existing Medical Conditions

Many policyholders omit illnesses, surgeries, medical conditions, or ongoing treatments when buying insurance. This is a problem because life insurance companies verify medical history during the claims process. If they find that you lied about a pre-existing medical condition, they can deny the claim. Even small omissions can impact the claim.

How to avoid: Always be truthful and disclose your pre-existing medical conditions or treatments.

Risk #2: Misrepresentation of Lifestyle Habits

Lifestyle habits need to be accurately disclosed to your life insurance company. Examples include:

• Smoking
• Alcohol use
• Participation in extreme sports

High-risk life insurance policies cost significantly more than if you have lower perceived risk. If the insurance company uncovers that you lied or misrepresented your lifestyle habits, it can lead to a potential claim denial later down the line.

What happens if you change your lifestyle?

Difficult as it may be, people do manage to improve their lifestyle and lower their mortality risks. If you put in the effort to improve your lifestyle, it can be worth reaching out to your insurer and try to lower your life insurance premium. This can work if you have a term life insurance policy since upon renewal, you may be able to obtain a better rate.

How to avoid: Disclose your lifestyle habits upfront, even if it may raise premiums. Better to pay a little more for premium payments than to miss the death benefit later on.

Risk #3: Lapsed or Missed Premium Payments

Policies can lapse after missed payments or grace periods. Many policyholders will accidentally miss a payment or forget about their life insurance because they are healthy. Accidents and emergencies happen. Sometimes, families will only discover coverage lapses after filing a claim and having the claim rejected.

Grace periods are set lengths of time after payment due dates during which you can still make the payment without penalties. The grace period for life insurance policies is typically 30 or 31 days. Most standard life insurance policies have this month of grace period because the insurer wants you to maintain your coverage over the years.

What happens if I don’t pay my life insurance premium for a long time?

If you can’t make a payment during the grace period, your life insurance policy will no longer provide coverage. You would need to reinstate your policy, which has various requirements based on the insurer. This generally means:

• Paying all overdue premiums
• Paying any interest or penalties
• Undergo a new medical exam and/or questionnaire

If you fail to properly reinstate your insurance policy, it can lead to a permanent loss of coverage. This would be a huge problem for your beneficiaries.

How to avoid: Set up life insurance auto-pay or reminders so there is no lapse in coverage. Know what the grace period rules are in case you need to make a late payment. Reinstate the policy if you have to.

Risk #4: Engaging in High-Risk Activities Not Covered by Policy

You might not think scuba diving or boarding a private jet is high risk, but life insurance companies do. Life insurance policies may not pay out if you pass away due to an excluded hazardous, high-risk activity that you did not disclose. Common ones include:

• Private aviation
• Scuba diving
• Bungee jumping
• Skydiving
• Rock climbing

As long as you are honest about your high risk hobbies when applying for life insurance, the insurer will likely still grant you coverage, but at a slightly higher premium. The main point of importance is that before you buy a policy, you need to formally disclose high risk activities you are likely to participate in. That way if you pass away during the activity, the death benefit can still be granted to your beneficiaries.

High risk careers

If you work a career that has a high mortality rate, it can impact your insurance premium. High-risk careers include:

• Roof mechanic
• Piloting
• Mining
• Fishing
• Construction
• Logging

How to avoid: To cover high risk activities, you may be able to add riders to customize your life insurance policy. Read exclusions carefully so you are aware what activities your life insurance policy does not cover. For those high-risk adventures, you can look for specialized insurance policies with death benefits.

Risk #5: Inaccurate Beneficiary Designations

The beneficiary (or beneficiaries) refers to who shall receive the life insurance’s death benefit. Information on the life insurance policy needs to be up to date. Any outdated information, such as a divorced spouse still being listed, can lead to life insurance claims disruptions.

Conflicts between will and policy beneficiary

Many people wonder, does a life insurance policy beneficiary choice override a will? If there are any conflicts between your will and your life insurance policy designations, it can cause death benefit delays or rejections. In general, the insurance company does pay out to whomever had been named beneficiary by the policyholder. However, beneficiaries and heirs listed on the will may want to challenge the life insurance beneficiary designation. These legal proceeds can be lengthy, expensive, and painful for all parties involved.

Outdated beneficiary designations are one of the most common reasons families fight with each other after a loved one’s death. It is confusing if someone like a former spouse is still named on the life insurance policy, but not in the will.

Legally, some states have automatic revocation statutes. These laws automatically remove divorced spouses as beneficiaries, so you would have to manually add them back as a beneficiary if desired. Since state laws differ, it is best to ask an attorney or insurance professional.

How to avoid: Review your beneficiary designations regularly and make necessary updates as needed. Check your life insurance policy and will after major life events or losses.

Other Overlooked Pitfalls

Suicide clauses within the first two years of policy

Does life insurance cover suicide is a common question. There is typically a suicide clause in the life insurance policy that restricts payouts if the policyholder commits suicide within a certain period after the start of the policy (e.g. two years). State laws can also impact the suicide clause length or conditions. Some policies also consider the policyholder’s documented mental health when processing claims.

Fraudulent applications

Insurance companies take fraud extremely seriously since it is a major source of losses to insurers. Do not make any intentional misstatements to the insurance company.

Homicide

If there is a homicide case, insurers will need to perform extra steps to investigate and choose who should receive the death benefit due to the slayer rule. If a beneficiary is responsible for the death, they can’t receive the death benefit. In this case, the benefit would likely go to the policyholder’s estate or contingent beneficiary.

Living abroad in restricted countries

Life insurance companies often have clauses prohibiting visits to certain countries or high-risk regions. If you are a frequent traveler, a retiree who plans to travel around the world, or plan to live in another country, read the travel/residence restrictions of the life insurance policy carefully. If you fail to list or update your address correctly and pass away, life insurance may deny the claim.

Illegal activity

If you die while partaking in a criminal activity, your life insurance company may deny the claim. Even if you are not aware that you are committing a crime (such as illegal trespassing or doing drugs), it can still impact whether your life insurance company will pay out to your beneficiaries.

Since illegal activity can completely deny your beneficiaries a payout, it is advisable to be extra careful about what risks you partake in after buying a life insurance policy. Many retirees or those with terminal illnesses find themselves joining in on riskier, or even illegal, acts because of the desire to finish a bucket list or enjoy life to its fullest. Policyholders need to be aware of what can void their life insurance policy.

Death during waiting period

Most life insurance policies have a waiting period during which a death will not grant a payout. This is called the contestability period, which tends to be two years. Check your policy for the exact date of when the waiting period is over.

If the life insurance policyholder dies during the waiting period, the insurance company will thoroughly investigate the death (even if they do decide to pay out). This is in order to ensure that the application did not have any fraudulent information and that no contract terms were breached.

In some cases, the life insurance company will return premiums that have been paid to the beneficiary instead of providing the usual death benefit.

How to Protect Your Claim

Double-check application accuracy

When applying for life insurance, double-check all the information you’re filling in is accurate and complete. As tedious as it is reviewing paperwork, it is an important step to confirm everything is correct. Misrepresentation or omissions can lead to serious coverage issues later on.

Review policy exclusions

It’s easy to forget what your life insurance policy terms and conditions are as the years pass. Try to review your policy periodically, such as every year or two, so you are aware of the exclusions and restrictions.

Maintain consistent payment history

Maintaining coverage is important. If you fail to make a payment, there may be a lapse in coverage or coverage may get cancelled. Make sure you are consistently paying your life insurance payments. You can choose a policy that lets you pay monthly, quarterly, semi-annually, or annually. Annual payments are cheaper overall because you pay a large lump sum each year. However, it is easier to budget for monthly payments due to the lower payment installments each time. Pick a suitable policy payment type so that you can comfortably pay the premium.

Work with a licensed agent for clarity

Licensed insurance agents can help you with any questions you might have about your life insurance. However, beware of agents who make insurance sound like a guaranteed payout no matter what you do. There are terms and conditions with life insurance, like with any insurance product.

Dispute or file an appeal

Beneficiaries who get their claim rejected may be able to file an appeal if they believe the insurance claim decision was unfair or incorrect. Seeking legal help and obtaining professional advice from an attorney who helps with life insurance problems can be useful. There may be supporting evidence or details that your beneficiaries are overlooking that an expert can help with.

Conclusion

Life insurance provides invaluable peace of mind and financial assistance when your loved ones need it most. However, you need to meet policy requirements for the claims to be honored. Being transparent when obtaining life insurance helps ensure your beneficiaries will receive the protection as intended.

Review your policy to avoid costly mistakes in the future. Find the best life insurance today.