The primary purpose of life insurance is to protect family members financially after their loved one’s death. However, a life insurance policy is not offering guaranteed protection. Even if they are valid, legally binding contracts, they are usually filled with loopholes that insurance companies can leverage to not pay out the benefits. Below are Reasons Life Insurance Companies Deny Claims.
Generally, the insured policy owner pays premiums to the insurance company in return for its promise to pay a certain amount of money to the beneficiary after his death. When the insured person dies, the beneficiary has the right to submit a claim with the insurance company.
10 Reasons Life Insurance Companies Deny Claims
Why would a life insurance claim be denied?
Some of the excuses the insurance companies use in denying claims are not legitimate but designed to convince a beneficiary that his claim is denied for a valid reason.
1. The death happened during the contestability period
If an insured dies within the first two years from the date a life insurance policy becomes effective, the insurance company has the right to contest the policy.
When an applicant applies for insurance, he is asked to complete a life insurance application that requires information about age, weight, income, health, hobbies, criminal history, and so forth. Contestability means to investigate the deceased insured’s medical records and background information.
If, while contesting the policy, the insurance company finds information not reflected on the application, it may deny coverage. Any misleading or false information is considered “material misrepresentation”. For example, if failing to mention smoking habits, a history of alcohol or drug use or pre-existing chronic ailments such as depression or high blood pressure can be used as claim denial reasons. The insurance company may refuse to pay out the death benefit, even if their death had nothing to do with the misrepresentation.
Only material misrepresentations (those that affect risk) can result in a policy cancellation. Many insurance companies use contestability as an opportunity to deny a valid claim even if a misrepresentation/non-disclosure on the application is not material.
However, if death after the contestability period and their background information is not accurate, usually, misrepresentation won’t be an issue. It becomes one if the policy was purchased for the benefit of the beneficiaries – the covered individual committed suicide or the insurance was bought in a plot to murder the insured and collect the money. Insurers deny such claims after the contestability period has ended.
2. The type of death wasn’t covered in the policy
Every life insurance contract has several exclusions that describe situations that the policy does not cover. These exclusions are worded very carefully by insurance companies so as to encompass many possible scenarios that they can use as reasons to deny life insurance policies.
Many exclusions are ambiguous and many, when taken together with other exclusions, cancel each other out. Still, life insurance companies use them routinely and very often to deny claims.
Here are some of the most common exclusions life insurers invoke as reasons to refuse to pay out death claim benefits:
- Death due to suicide
- Death due to drug or alcohol abuse
- Death due to homicide
- Death due to illegal activities
- Death due to extreme and dangerous hobbies and activities
- Death due to acts of war
- The employer failed to submit a waiver of premium
3. Policy premiums were not paid, leading to a lapse in payment
Usually, a life insurance policy is only active for as long as premiums are paid. When no premium is made when it is due, a policy may lapse/terminate.
Denied claims due to lapse are very common and insurance companies often use nonpayment of premiums as a reason to deny a claim even when a claim should be paid. As a beneficiary, you have the right to know whether the insurance company sent premium-due notices to the correct address and whether the notice clearly warned the insured of the impending lapse.
4. There is no beneficiary designation on file
Another reason to be denied a life insurance claim is if the insured failed to name a beneficiary. Every policy has provisions regarding who should get the proceeds if there is no designated beneficiary.
When a beneficiary is not named, an insurance company will pay the proceeds either according to the law of the state where the policy was taken out or according to the policy terms. Such claims may result in lengthy delays and denial as insurance companies may pay the benefits to the wrong person.
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5. The beneficiary was changed after a divorce
Many state laws automatically revoke a former spouse as a life insurance beneficiary on a policy.
However, these laws have many exceptions. Generally, they apply only to state law claims and should not revoke beneficiaries in cases controlled by federal laws. Claim examiners working for life insurance companies may not know all the intricacies of such laws and interplay between federal and state statutes, therefore they can easily invoke this as reason to deny your claim.
During divorce, life insurance also discusses child support actions. In many cases, a parent is ordered by court to maintain his children as beneficiaries on his life insurance policy.
If the parent later violates the court order and changes beneficiaries, a life insurance claim filed by the children may be denied. If your case involves a court order and a subsequent beneficiary change after divorce, you may need to speak with an attorney before the claim is filed.
6.The beneficiary on the policy is a minor
When an insured lists a minor child as a beneficiary, a life insurance claim may be delayed, because a minor child cannot receive the proceeds without a guardian.
A life insurance lawyer will help you expedite payment of your claim by making sure proper guardianship documents are filed.
7. The insured did not name a spouse as a beneficiary in a community-property state
In a community-property state, a spouse may claim at least half of the proceeds from the life insurance policy on a deceased spouse. A life insurance lawyer will help you understand your rights.
8: The policy was purchased less than two years ago
When you purchase a life insurance policy, most insurance companies enforce a mandatory contestability period in the first two years of coverage. If the insured dies within this two-year period, the company will review his application and deny any claim if insured gave inaccurate information.
9: Your loved one committed insurance fraud under state law
There are some state laws that apply past the contestability period. Depending on where you live, your policy could be invalidated if your relative lied about his age, health history, or other important fact that would affect the amount of coverage.
10: The policy was not “in force” at the time of death.
This is the most common type of life insurance benefit denial. If your loved one ever missed a payment, the insurance company can claim that your policy was not “in force” at the time of death—and therefore, they do not have to pay the amount of the claim.
Every delay or denial should be reviewed by an experienced life insurance attorney and contested if it appears that a claim was wrongfully delayed or denied.