5 Common Reasons Life Insurance Won’t Pay Out And What To Do About It
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Term life insurance is essentially a gamble between the policyholder and the insurance company. If the policyholder outlives the term of their policy, the insurance company wins because they get to keep the insurance premiums and the policyholder gets nothing in return. If the policyholder dies before the policy expires, then the insurance company loses and must pay the beneficiary more than was paid into the policy.
In order to prevent fraud and abuse, when and how the benefit can be paid out is highly regulated. For example, a term life insurance policy will include clauses called exclusions. Each exclusion describes a situation where the policy does not have to be paid. The exclusions describe things like intentional deaths and deception or fraud by the policy-holder.
If you are a life-insurance beneficiary and the company refuses to pay after an untimely death, they are probably citing one of the policies exceptions as the reason. With the help of a life insurance lawyer, you may be able to reverse their decision without even going to court.
Lies on an Insurance Application
The most common reason insurers refuse to pay out claims are material misrepresentations on their insurance application. When shopping for a policy, a lot of people will try to get away with little white lies in an attempt to get a lower rate. The most common lies are about drinking, smoking, and body mass. When a little white lie can mean thousands of dollars in savings, some people just can’t resist. And their dishonesty might prevent a claim from being paid or substantially reduce the benefit that is paid.
Life insurance policies have what is called a contestability period. If you die within the first two years of the policy being in force, any misrepresentation you made can be used as grounds to void the policy completely and refuse to pay.
After the two-year contestability period, a policy can only be voided for explicit fraud. Otherwise, the difference between what the deceased actually paid and what he should have paid is taken out of the benefit, and the beneficiary receives whatever is left.
Term life insurance has a complicated relationship with suicide. In clear-cut cases of suicide, most policies will simply refuse to pay out if it is within the two-year contestability period. After that, most policies will pay out as with any other accidental death.
Many cases border on suicide, but the intent is not always clear cut. A person has an advance directive and gets in a car crash. Life support is removed. Is that a covered cause of death? After surgery, a patient overdose on narcotic painkillers. Is that suicide or accidental death? In these borderline cases, you may need a lawyer to represent you. A suicide victim’s policy can payout, but the insurer will try their best not to.
Death in Combat
Almost all term-life insurance policies have an exception for deaths in a combat zone or as part of broader military service. When a soldier is deployed on active duty they are in an exceptional level of danger compared to a civilian, combat troops even more so.
Insurance premiums are decided by measuring the risks of an untimely death. Soldiers can buy cheap term-life policies that would cover them in case of an untimely death stateside and while deployed to safe countries like Japan and Germany. But if they die in a training accident or from enemy action, a standard term-life policy won’t pay out.
Unscrupulous insurance agents might try to deny any claims from a serviceman's family under this clause, even if the soldier died of unrelated causes, like a car crash or medical emergency.
Soldiers can get term life insurance from several reputable providers, like the Servicemen’s Group Life Insurance program or the Army & Airforce Mutual Aid Association. These warfighter-friendly insurers offer term life and disability insurance. Some even offer special short-term policies for a tour of combat, so that soldiers don’t have to pay higher premiums when they come home.
Living Abroad or Travelling
Many less expensive term-life policies are extremely limited in the coverage they provide geographically. Most insurers break the world into risk zones. The kind of risks that scare vacation planners, like destinations with frequent kidnappings or terrorist attacks, also scare insurance companies.
Local health conditions are also of great concern. The developing world still struggles with frequent pandemics like malaria and west-nile virus. Even in places without a high disease risk, parts of the developing world lack modern medical facilities and emergency services.
The kind of activity a policyholder does abroad also contributes to their insurance risk. Germany might be a safe country, but someone who goes skiing in the Harz Mountains is a much greater liability than a businessman working in Munchen.
As a result, many term life policies have strict policies about travel to high-risk locations and participation in adventure sports. If the policyholder was honest about their hobbies and paid a premium, then they should be covered. But if they lied about a risky pastime or hid that they travel to a dangerous country, insurance companies could have a valid reason to deny the claim within the contestability period.
Missing or Foreign Paperwork
Even when the policy covers foreign death claims, the paperwork provided (or not provided) by foreign governments can cause problems when making an insurance claim. One of the biggest problems is securing the foreign equivalent of important American documents like coroner’s reports and death certificates.
Policyholders passing away in Mexico often create massive paperwork problems because of Mexican law and legal tradition. Based on old Spanish law, a coroner does not have to actually view the body. As long as a coroner reviews the medical paperwork and there is no suspicion of murder or malpractice, a death certificate can be issued. Even when an autopsy is performed, photos are only taken if there is evidence of a crime like wounds or injuries. Taking photos of a naked corpse is considered disrespectful to the dead.
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Regardless of whether the country of death has similar legal and documentation systems, the insurance company will need both an original death certificate and a certified translation of the related paperwork. A delay in obtaining documents that satisfy this requirement will delay payment of claims.
About the Author: Veronica Baxter is a freelance writer, blogger, and legal assistant operating out of Philadelphia, Pennsylvania.