Reasons Why Life Insurance Won't Pay Out

Most life insurance policies perform the way they are supposed to. The policy owner pays premiums; in return, insurers pay a benefit amount to the beneficiaries upon the insured's death. If the claim for the benefit is denied, the insurer will give written notice of the denial, along with the reason for their decision. Knowing why a life insurance company may deny a claim and the documentation you may need to appeal is helpful.

Reasons why life insurance won't pay out

A death in the family is a reason to pause and reflect on the meaning of family and friendship. Worrying if a life insurance policy will pay out can burden your fond memories. To avoid confusion at an emotional time, it's helpful to know the conditions of the insured's life insurance policy that may cause a claim to be denied.

Type of death

Elements of a life insurance contract, such as exclusions, provisions, and covered risks, could prevent the benefit from being paid. Another reason a policy may not pay out is the type of policy the insured purchased. A term life policy must be renewed, and some permanent policies include living benefits that may reduce or eliminate the benefit amount when used.

If a life insurance company denies a claim, beneficiaries can appeal. Life insurance policies usually contain exclusions of some risks that cause the covered peril. States also require provisions to help standardize policies. Typical policy exclusions include:

• Death that occurs while committing a felony
• Aviation
• Hazardous hobbies or occupation
• Suicide
• War

Death that occurs while committing a felony and the war exclusion, death resulting from war, are common risks that an insurance company may exclude.

Other reasons

An aviation exclusion excludes paying the death benefit if the insured was involved in operating an aircraft. Some insurance companies accept hazardous occupations and hobbies, such as construction and fire eating, but the insured will likely pay a higher premium, and the exclusion may prevent the benefit from being paid. Most life insurance policies include a suicide provision, which states the benefit amount will not be paid if the insured commits suicide within the first two years of obtaining the policy.

Insurers may also contest a claim if the insured lied on the application. An intentional misstatement on your life insurance application is a fraud; however, the misrepresentation must be material.

A material misrepresentation would alter the insurer's decision to approve the risk. If the insured had a history of heart attack but left out that information on the application, and it goes undiscovered by the insurer, they could contest the claim. However, insurance companies have a vigorous underwriting process and will usually catch misrepresentations on the application before issuing the policy.

Although exclusions could be a reason a life insurance policy is denied, most states require a provision called the incontestability clause. This clause states that the contract is incontestable after a named amount of time, usually two years. The insurer cannot deny a claim for any reason except for nonpayment of premiums, which caused the policy to lapse.

What does life insurance cover?

Life insurance policies are contracts that financially protect beneficiaries from hardship due to the insured's death. Exclusions that may be included in the contract are risks that may cause death. The peril is covered if the insured passes away and was not performing activities within the policy's exclusions. However, the policy must be in force at the time of the insured's death. The claim will be denied if the policy lapsed for any reason, including nonpayment.

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Does life insurance cover heart attack?

A heart attack most often isn't a reason for an exclusion. Insurers may deny applicants coverage during the application process due to preexisting conditions. In this case, an applicant may want to consider a guaranteed or simplified issue life insurance policy, which does not require a medical exam.

Does life insurance cover accidental death?

If the accident that caused the death is not specified in the exclusions, it is covered. For example, if the insured's policy excludes motorcycling, and the insured passes away from an accident on a motorcycle, the claim could be denied. Life insurance companies carry products called riders to extend the coverage of a life insurance policy. A typical life insurance policy rider is an accidental death benefit rider.

An accidental death and dismemberment rider (AD&D) is a common policy rider. Considered a double or triple indemnity rider, an AD&D benefit is usually double or triple the base policy's benefit amount. AD&D pays an additional benefit amount if the insured's death is caused by an accident or if the insured is dismembered.

Does life insurance cover natural death?

Life insurance covers natural death. Ideally, life insurance companies want their insureds to pass away in a realistic amount of time. Insurance company underwriters base premiums on mortality, interest, and expenses.

Mortality is the insured's natural risk of death. Underwriters draw on information on mortality rates compiled by the National Association of Insurance Commissioners (NAIC) called the Commissioners Standard Ordinary (CSO) Table.

The CSO Table reflects the mortality experience in the United States for every age group from birth to 120. Underwriters use information from the CSO Table to determine premiums. If you are young and in good health, you will likely pay less premiums than someone older with a history of illness. Underwriters base premiums on the amount they expect the insured to pay based on the mortality rate. Ideally, life insurance companies prefer insureds to pass away from a natural death.

Do you need life insurance if you die of old age?

Another reason a life insurance policy may not pay out is because the insured outlived the policy. A term life insurance policy lasts for a specific amount of time. Once that time is reached, the policy expires and terminates. The insured will not pay a benefit if the policy does not renew.

A permanent life insurance policy lasts the insured's lifetime, usually to age 120. If an insured outlives a permanent life insurance policy, the policy will endow, meaning the premiums paid or the cash value is equal to the death benefit amount. When this happens, the insurance company either pays the benefit to the policy owner, ends the contract, or extends the coverage.

If the insured dies of old age within the specified time frame of a term life insurance policy, the benefit will pay out. The same is true for a permanent life insurance policy if the insured dies of old age, and does not outlive the policy.

Life insurance withdrawals and surrenders

Permanent life insurance includes cash value that can be used as a living benefit. When the policy owner uses the cash value as a living benefit, the death benefit is affected, and under certain circumstances, the policy may be canceled. Cash value on a traditional whole life insurance policy grows at a guaranteed rate, while for other policies, such as a universal life policy, the cash value reflects market conditions.

A cash-value loan is one in which the insurer provides a loan to the policy owner and uses the cash value of the life insurance policy as collateral. Policy owners are not required to pay back the loan, but if the insured passes away before the loan is paid, the benefit amount will be reduced by the amount of the loan plus interest. The policy stays active as long as the total amount of the loan plus interest does not exceed the cash surrender value. If the loan amount with interest exceeds the cash value, the policy is canceled.

Universal life insurance policies allow for withdrawals rather than loans and surrenders. Policy owners of universal life insurance may use the policy's cash value to cover monthly value. However, withdrawals reduce the policy's death benefit and cash value by the withdrawal amount. As long as the policy's cash value supports the policy's monthly deductions, the policy remains in force.

How long does life insurance take to payout?

Life insurance policies contain a provision stating how and when the death benefit will be paid. The policyholder may choose the type of payout or settlement option to use. To initiate payment of a claim, the life insurance policy must be in force at the time of the insured's death, and there must be proof the insured died, evidence the insured did not pass away due to an excluded activity, and a living beneficiary. Once the claim is filed, life insurance companies usually pay out the death benefit within two weeks to 60 days.

Policy owners can choose how the policy will pay out. They may choose a lump-sum cash payment, where the beneficiary receives the benefit in one lump-sum amount. An interest-only payment, where the insurer holds the policy proceeds in an interest-bearing account until a future date and pays the beneficiary only the interest until then.

A fixed-period settlement option is one where the death benefit is paid equally over time. A fixed-amount settlement option is one in which the policy pays out a named amount until the full benefit is paid.

What can you do if your life insurance claim is declined?

If your insurer denies your life insurance claim, you can contact the insurer and provide further documentation to support the claim. For example, proof that the insured passed away of the covered peril without partaking in any of the policy's exclusions or prove the policy was in force at the time of the insured's death. Denials can be appealed directly through the insurer or a lawsuit.

Life insurance policies are like any other contractual agreement where at least two parties are making an exchange. Policyholders pay premiums, and the insurer promises to pay the benefit amount to the policy's beneficiaries upon the insured's death. And just like most contracts, some conditions may apply. Have you ever appealed a life insurance claim denial? Let us know in the comments and learn more about life insurance contracts on Healthnews.