To financially protect our loved ones if we are no longer around to provide for them, life insurance is an excellent financial tool. The insured will likely want to feel secure that their loved ones will receive the benefit after they pass away. Some conditions in life insurance contracts may disqualify the benefit from paying out, including how the insured dies. And some policies may only pay for certain types of death.
What disqualifies a life insurance payout?
For a life insurance policy to pay out the face amount, or the benefit amount of the policy, it must be in force, or active when the insured passes away, for the beneficiaries to file a claim.
Whole or permanent life insurance policies last the insured's lifetime, and term life insurance policies last for a designated amount of time and then terminate. Term life insurance policyholders must renew the contract to maintain coverage.
Life insurance companies may also terminate policies for nonpayment, or misrepresentations made on the insurance application.
Nonpayment of premiums
If you fail to pay your life insurance policy's premiums, the policy will lapse, and coverage will end. Premiums may be paid monthly, quarterly, annually, or semi-annually. Most life insurance policies have provisions and exclusions. A common provision in life insurance contracts is a grace period. The grace period gives the policyholder some time, usually 31 days, to pay the policy's premium after its due date before the policy lapses.
Material misrepresentations
Life insurance companies may end the contract if they discover the applicant lied on the application, also called a misrepresentation. The misrepresentation must be material for an insurer to terminate a life insurance contract. A material misrepresentation is when the applicant purposely withholds information that may cause higher premiums or the coverage to be denied.
A misstatement of age or sex is not considered a material misrepresentation. If the applicant misstates their age or sex on the life insurance application and the insurer catches the error, they may adjust the premiums to reflect the applicant's actual mortality. However, if an applicant lies on their life insurance health questionnaire, this may be considered a material misrepresentation, and the contract may be voided or may result in the life insurance claim being denied.
To charge appropriate premiums, life insurance companies perform health exams and questionnaires to determine the applicant's mortality. Life insurance covers the risk of the loss of life, and the higher the risk, the more expensive the premiums. The contract may be terminated if the insurer finds out the applicant is a smoker and lied about it on their application.
Another common policy provision in life insurance contracts is the incontestability clause. The incontestability clause states that after the policy has been in force for a certain amount of years, usually two years, the insurer cannot terminate coverage due to a misrepresentation on the life insurance application.
If your insurance policy is in force when you pass away, your life insurance company may deny the claim for benefits if you died in a certain way. Types of death that are not covered by your life insurance policy are included in the policy's exclusions.
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Life insurance policy exclusions
Life insurance covers natural death. Natural death includes passing away from an accident or illness, and it will also cover the loss of life due to a pandemic. Types of death not covered by a life insurance policy are listed in the policy's exclusions. Typical life insurance policy exclusions include:
- Hazardous occupations or hobbies
- Aviation
- War
- The commission of a felony
- Suicide
- Slayer rule
Hazardous occupations or hobbies
If you have a dangerous occupation, like a construction worker or a firefighter, and you pass away on your job, your life insurer may deny the claim. Also, if you have life-threatening hobbies such as sky diving or bungee jumping and you die while performing these activities, your insurance company may not pay out the death benefit.
Aviation
The Aviation exclusion prevents the death benefit from paying out if the insured passes away while operating an aircraft as a crew member. It does not include travel as a passenger.
War
Also called the war clause, the war exclusion restricts the benefit of the policy being paid out if the insured's death is a direct result of war.
The commission of a felony
If you die while committing a felony, your life insurance policy will not pay out the death benefit.
Suicide
If you take your own life, your beneficiaries will not receive the benefit. However, due to the suicide provision, in most life insurance policies, it will only not pay out within the first two years of the policy. The suicide provision states that after two years, death by suicide is covered by the policy. This provision is to inhibit people from taking their own life so their beneficiaries may gain the benefit.
Slayer rule
The beneficiary of a life insurance policy cannot kill the insured and gain the death benefit. The Slayer statute is a law that prevents a murderer from financially benefitting from their victim's death.
Certain policies also may only pay out if the insured dies in a particular manner, such as an accidental death and dismemberment life insurance policy or rider.
Accidental death and dismemberment
An accidental death policy is most commonly found as a benefit rider. It is called a double indemnity or triple indemnity rider because it is usually purchased to double or triple the policy's benefit amount if the insured dies due to an accident. Death resulting from an illness, self-inflicted wound, or physical disability disqualifies the benefit from paying out.
Additionally, if the insured is dismembered, the policy will pay the benefit amount. These policies will pay the full benefit if you are totally dismembered, like losing both of your eyes, and will pay half the benefit amount if you are partially dismembered.
Laws regarding life insurance claims
James Gandolfini was an actor best known for his role as Tony Soprano in the television series, "The Sopranos." When Gandolfini passed away from a heart attack, a conflict between his estate and life insurance company ensued. Ohio National Life Assurance Company said Gandolfini lied on his application about pre-existing conditions, and they were not informed of his travel plans, as the actor died while on holiday in Italy. The insurance company refused the claim. However, it was eventually settled for an undisclosed amount.
Life insurance is regulated by the state. The National Association of Insurance Commissioners (NAIC) produced model laws to ensure life insurance claims are treated fairly and justly. Examples of these model laws include:
- Misrepresenting facts or provisions applicable to the coverage
- Failing to promptly acknowledge correspondence about claims
- Forcing claimants to file lawsuits to collect claims and offering less than the face amount of the policy
- Failure to inform claimants of their decision within 30 days
- Failure to give a reasonable explanation of why a claim was denied
Insurers may face disciplinary action by the state, and penalties may be imposed. Furthermore, you can sue your insurance company if they unjustly deny your claim.
The entire purpose of a life insurance contract is to pay out a benefit once you have passed away. But life insurance is not like purchasing a microwave and returning or exchanging it once you take it home and discover it is not functional. It's important that you understand your life insurance policy's exclusions and what it covers to help avoid any mishaps you will not be around to help remedy.
FAQ
Does life insurance cover suicide?
Almost all life insurance policies include a provision that states that after two years, the policy will pay the death benefit if the insured passes away due to taking their own life. However, if the insured commits suicide before the two years have passed, the insurer will not pay the benefit.
What happens if you die a month after getting life insurance?
If your life insurance policy does not have a graded death benefit, where the policy will not pay the full death benefit until two to three years of the policy being in force or a waiting period of over a month, the policy will pay the death benefit as agreed upon in the contract.
What does natural causes mean?
In life insurance, death from natural causes means death from an illness or accident. Life insurance policies will also cover deaths from global pandemics and murder as well.
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For a life insurance policy to pay out, it must be in force at the time of the insured's death. Nonpayment of premiums and material misrepresentations can cause insurers to cancel your policy. Also, be sure to renew your term life insurance policy after it reaches its term length.
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Most life insurance policies have an incontestability clause that prevents insurers from canceling policies due to misrepresentations made on the life insurance application after a certain amount of time, usually two years.
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The types of death that life insurance policies do not cover are listed within the contract's exclusions. Be sure to familiarize yourself with your policy's exclusions to try to avoid your policy's claim being denied once you pass away.
3 resources
- Life Insurance Law. The power of life insurance incontestability clause.
- Insurance Neighbor. Can my life insurance company ever cancel my policy?
- Law Office of J-P. Gonzalez-Sirgo, P.A. What is the slayer statute in life insurance claims.
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