Life Insurance Claim Denials: Real Stories and Lessons Learned

There is nothing worse than buying life insurance only for your loved ones to get their claims denied, because by then you can’t do anything to help. Life insurance offers immense peace of mind and financial protection, but you need to beware of preventable problems.

In this guide, we will go over real-world denial stories, highlight how life insurance works, and explore ways to enhance your coverage.

Why Life Insurance Claims Get Denied

Misrepresenting your information on applications is one of the most common reasons for a life insurance claim denial, up there with missed premium payments and policy exclusions. Essentially, life insurance companies don’t want to pay out if there is insurance fraud or criminal acts. They also only pay out for types of deaths that are not excluded by the policy.

What is the contestability period? The contestability period lets life insurance companies investigate and deny claims due to misrepresentations. This is usually the first two years after you buy the policy.

After the contestability period, can claims still get rejected? Yes. It is just much harder for the life insurance company to prove misrepresentations or fraud.

Case Study #1: Nondisclosure of Medical History

Medical history impacts life insurance premiums and claims. Any serious medical events in the past may raise your premium, but that is so the life insurance company can account for your greater health risks.

If you, when buying the policy, do not disclose that you have any serious or chronic illnesses, the life insurance company may deny your claim during the contestability period. The problem is, many people who are just buying life insurance think that the insurance company or broker cannot see your medical records, which is usually true. So people will think that they can hide these medical facts from the insurance company. However, after death, life insurance companies usually investigate the policyholder’s medical history before granting the death benefit.

Full honesty on the application is critical, even for minor medical conditions and treatment that you think are negligible.

What medical conditions should be disclosed?

Essentially, anything you know about your health should be included, even if it seems harmless or is being well managed. Common conditions include:

• Diabetes
• Hypertension
• Prior heart attacks or strokes
• Asthma
• Autoimmune disorders

Medical history should also be honestly included. This means anything serious in your past, like a hospitalization or major surgery, should be listed in your life insurance application. The life insurance company can access your medical records.

Case Study #2: Lifestyle Misrepresentation

Jason smokes recreationally. He hears that life insurance can be much more costly if you’re a smoker, and he thinks he’s only 30 years old, why should he have to disclose that he smokes sometimes?

He buys a cheap life insurance policy because he claims that he is a healthy non-smoker on his application. He gets into a deadly car accident, leaving behind his spouse and an infant child. Medical records prove that he is a smoker.

Smoking, alcohol, and hazardous hobbies are lifestyle habits that can invalidate your policy. Do not misrepresent your lifestyle on purpose to get a lower premium, it is not worth the risk of an invalidated policy.

Case Study #3: Policy Lapse Due to Missed Premiums

Life insurance premiums are usually paid monthly, though annual payments can come with a nifty discount.

A senior passes away while holding a permanent life insurance policy. However, he has been borrowing against the policy while failing to pay monthly premiums, causing a lapse in coverage. His family finds out the policy has lapsed when they file for a death benefit.

How to avoid coverage lapses

Auto-pay is the basic way to avoid lapses, though you may incur fees if you find your account getting overdrafted. You can also set up reminders if you forget to pay a monthly premium.

Life insurance premiums have a grace period. If you fail to pay the premium immediately, the grace period means you still have coverage until the period ends. Pay the premium ASAP to get caught up on your payments.

Most life insurance policies come with a 30 to 60 day grace period. After all, life insurance companies want you to keep making payments instead of forgetting about it and then giving up on it. Check your policy to see what terms are associated with late payments.

Case Study #4: Excluded Activities

Life insurance companies do not want to cover daredevil or self-destructive acts, which is understandable, but did you know that even common hobbies are also often excluded? Policy exclusions are situations or conditions that prevent life insurance from covering the death. These are high-risk activities, such as:

• Adventure sports (e.g. skydiving)
• Private aviation
• Drug or alcohol usage resulting in death
• Illegal activities and crime
• Acts of war

Read your life insurance coverage exclusions carefully so you are fully aware of the risk certain hobbies or lifestyle choices have. The good news is that many life insurance companies offer riders for high-risk activities, letting you pay a little extra to ensure coverage.

Case Study #5: Beneficiary Conflicts

Make sure that your life insurance policy is constantly up-to-date. Any major life events should mean reviewing your life insurance and making changes as needed.

For example, a couple gets divorced. The woman changes her will to exclude the ex-spouse from her life insurance. However, the life insurance policy still has the ex-spouse listed, not the current family. When the woman passes away years later, legal disputes start arising between the family and the ex-spouse, resulting in legal fees and emotional stress.

In another situation, a couple gets amicably divorced. Their policy says it automatically removes an ex-spouse beneficiary after divorce. When the policyholder passes away, the ex-spouse is unable to collect the life insurance benefit even though they were still close friends and dependent on each other.

The lesson here is that you should always update beneficiary designations after major life changes, such as a new child or a name change. Make sure your life insurance aligns with the rest of your estate plan and reflectS your latest relationships/coverage goals.

Case Study #6: Suicide

Life insurance policies generally have a suicide clause: if the policyholder commits suicide during the designated period of time after buying the policy (usually 2 years), then life insurance will not pay the death benefit.

Note that failing to disclose mental health conditions can also be considered insurance fraud, especially if the death is related to the mental health condition. This can lead to denied benefits. When applying for insurance, it is generally safer to disclose your conditions even if it can raise the life insurance premium, otherwise you risk denied claims for your loved ones.

Warning Signs That a Life Insurance Claim Might Be Denied

Application inconsistencies or omissions

Anything you misrepresent on the life insurance application can lead to a claim being denied if you pass away shortly after (i.e. within the contestability period of ~two years).

Missed Payments

If you’re getting missed premium notices or warnings that you are going to have a coverage lapse, it means dying near this time could leave your loved ones with no death benefit at all.

Death during contestability period

Any death during the 2-year contestability period right after you buy your policy can be closely scrutinized for misrepresentation. This is for the life insurance company to discourage insurance fraud and other problems.

Complex claims involving foreign deaths, crimes, or high-risk activities

If the death was suspicious or violent, it is possible for the life insurance company to have reason to deny the claim. Any illegal activities or potential substance abuse will have to be investigated. If there is a suspected homicide, the life insurance company may also need to see if the Slayer Rule will be enacted, preventing beneficiaries to life insurance policy from receiving the money if they were involved in the death.

Any high-risk activities could also be denied, though life insurance plans usually have a long list of exclusions for you to get a good idea of what acts are considered high risk.

Beneficiary designations that conflict with wills or trusts

Your estate plan includes anything from wills to Power of Attorney choices. Many people think they can list who gets the life insurance payout in their will. However, it’s who you designate as the life insurance beneficiary in the policy itself that matters.

How to Prevent a Denial

1. Be meticulous about your life insurance application

If you think it’s relevant to your life expectancy or situation, put it on the life insurance application. If you have nothing to add, think very carefully about what you’re missing. It is best to be truthful and thorough on the application so that the life insurance company has no reason to deny a claim, especially if it happens during the contestability period.

Omissions in your life insurance application are much harder to check and use as a reason for denial outside of the contestability period. However, life insurance companies can still investigate and prove suspected fraud, denying the claim even outside of the contestability period.

2. Keep premiums current

Make payments as agreed upon in the life insurance contract. Use reminders and if there are any lapses, pay the premium (and any late fees) back as an essential obligation, just like rent or groceries.

What should you do if you can no longer afford your life insurance? Contact your insurer. They may offer payment options or financial relief so that you can get over your current financial hurdles, and return to consistent payments in the future once your income is steady again. Communicating is often the way to avoiding coverage lapses and extra penalties.

3. Review policies regularly, especially after life changes

Many people buy a life insurance policy just to never look at it again. Once you have coverage, it is best to review the policies routinely. If there are any major life events, these should act as triggers for estate plan reviews, which include looking at your life insurance plan.

You may need to change your beneficiary designations after major life changes.

Universal life insurance policies also let you modify your policy coverage amount and premiums. These adjustable plans are highly recommended if you want more flexibility and control when buying permanent life insurance coverage.

4. Work with a licensed agent or advisor

The fine print of life insurance can be frustrating, especially if you live with any complex situations. Consult with an attorney or licensed agent to explore the best life insurance for your specific needs and goals.

A business advisor is particularly needed if you want to use a life insurance policy to fund your business’ buy-sell agreement.

5. Communicate with beneficiaries so they know claim requirements

Telling your beneficiaries about how to make a claim and whether there are any claim requirements is recommended. Otherwise, your beneficiaries may not even know how to get the death benefit if you pass away.

Conclusion

Many life insurance claim denials are preventable. If you act diligently and transparently, understanding how life insurance companies work, you can ensure your loved ones are actually protected by your life insurance coverage.

Review your life insurance choices now to ensure your loved ones won’t face unexpected challenges later.