Life insurance is a death benefit that can help your loved ones deal with the financial impact after your death. Typically, you purchase a policy and pay a monthly premium to your insurer. In return, they pay out a lump sum after your death to your designated beneficiary.
The unfortunate truth is that sometimes life insurance claims get denied, and your beneficiary is left with a difficult battle or nothing at all. Knowing your policy and some of the most common reasons that life insurance claims get denied can help you avoid this outcome altogether.
The 5 most common reasons for these claims to be denied are:
- Incorrect information in the application
- Nonpayment of premiums/policy lapse
- Contestability period
- Policy exclusions
- Insufficient documentation
Keep reading to learn more about each of these situations.
Incorrect information in the application
When you purchase a life insurance policy, you need to go through a fairly rigorous application process. This is so the insurer has the information they need in order to assess your risk and decide on your premiums and coverage.
In this application, you’ll answer questions about your physical and mental health. You have to disclose your age, your family’s medical history, any high risk activities you engage in, the length of policy or coverage needed, and possibly more.
The application is followed by a medical exam. This includes a physical exam where a doctor will check your height, weight, and blood pressure. They may also collect blood and urine samples as well as your medical history to get a full picture of your health.
After both these things are provided, the insurer does a full assessment of the claim to determine the monthly premiums.
A common reason for denial of a life insurance claim is when people put misinformation in their application. This can be done intentionally or unintentionally. Sometimes people will include what they consider to be white lies to lower their premiums, or leave out information that they don’t consider important.
Some examples of this:
- Saying that you aren’t a smoker when you are or were in the past;
- Being dishonest about your driving history;
- Claiming that you don’t have a history with drugs or alcohol if you do;
- Downplaying the risk factors in your career or activities in your personal life.
You may think being slightly dishonest about these things will lower your premiums or get you approved. But, if they find out during the application process that you have been dishonest, the consequences can be severe. You could be denied or even be accused of insurance fraud.
If an investigation is done after the death and they discover the dishonesty at that point, your family could end up receiving a much lower amount of money or the claim could be denied entirely after years of you paying the premiums.
Nonpayment of premiums or policy lapse
Life insurance is a contract between you and the insurer. You agree to pay them a monthly amount for a set number of years; in turn, they pay out a lump sum to your beneficiaries in the event of your death. If you don’t pay the monthly premiums for your life insurance, the policy lapses and you lose your coverage.
Most life insurance policies will have a grace period where the policy will still hold after a lapse in payment. This grace period is typically 30 days, but could differ with each individual company and policy. If the policy lapses after you miss a payment, you can request to have the policy reinstated. Some insurers allow this within 5 years of the lapse, pending a medical review. Usually, you must also repay the missed payments — with interest.
This isn’t to say all companies will allow this. It is completely at their discretion. Some companies will allow you to reinstate the payments, but may restart the contestability period. In some cases, you will be out of luck if you don’t pay the premiums, but you could cancel and “cash out” the remainder of the claim with a penalty.
If you have life insurance through your employer, typically the premium will come out of your pay and you won’t even think about it. However, it is important to remember that if you leave your job, you lose that coverage completely.
The contestability period for a life insurance claim is the period of time when the insurer can investigate and deny claims. The period is typically within two or three years of purchasing the life insurance policy. This varies with different policies.
In other situations there may only be an investigation if there is a red flag for the insurer. Red flags might include a suspicious cause of death or something that contradicts the application. However, if the death occurs during the contestability period, there is an investigation no matter the cause.
This doesn’t mean that your family will be left with nothing if you die within the first two or three years — it just means that a mandatory investigation will be performed.
During the contestability period, the claim might be denied for any number of reasons. Typically, they will investigate to see if you answered the questions on your application honestly. If you didn’t, they can use that fact to deny your claim even if it is unrelated to the result of death.
It’s important to be aware of the contestability period, but it isn’t likely that you or anyone else can control it as death is unpredictable in most cases.
As I’ve mentioned a few times now, every life insurance policy is different. It is so important to know what you’re signing up for.
A policy exclusion is a clause placed in the policy to eliminate coverage for a certain type of risk that they aren’t willing to ensure. Many policies have clauses that make it so that if you pass away under certain conditions, they don’t have to pay out.
Some of the most common exclusions are as follows:
Suicide. Some insurance companies have this clause in place to deter people from ending their life when they or their beneficiaries are struggling financially. Some policies will pay out if the death is a result of suicide — but only if it happens outside of the contestability period.
Extremely risky behaviour. Think skydiving, scuba diving, or rock climbing. The insurance company may argue that death due to a risky hobby is a “self inflicted injury,” and that if you weren’t engaging in reckless behaviour you would still be alive. Or, they might mention the fact you didn’t declare this behaviour on your application so the whole contract was in bad faith.
Intoxication. They could have a clause in their policy that excludes death by intoxication. If your cause of death is due to alcoholism or a drug overdose, they won’t pay out.
They might have an act of war exclusion if you’re in the military and die in the line of fire. This was more common in the past, but can still be found in some policies today.
There is usually a preexisting condition clause. This states that if the death was related to a condition that predates the purchase of the policy, your beneficiary won’t be paid out. These can be extremely difficult to prove. It can come down to something as simple as a single doctors visit that may not have seemed like a big deal, but was actually the beginning of a medical condition you couldn’t have predicted.
There could be a policy exclusion for almost anything. It’s crucial to know your specific policy and what your coverage is when purchasing the policy. Pay attention to the small details. It can sometimes be a good idea to have a lawyer read through it on your behalf in advance.
Finally, insufficient documentation can result in a denial of life insurance. This would be something that falls on the responsibility of the beneficiary — not the policy holder.
To be able to collect a life insurance policy you need specific documentation. You will always need a certified copy of the death certificate. You may also need to provide a copy of the insurance policy, the claims form, a physician’s statement, or full coroners report. If the death occurs outside of Canada, additional documentation might be required.
It’s important to know what you need to submit, and to get the correct documents in order. Some extra documents may be more difficult to obtain, but if you try to claim life insurance without them, the process could be prolonged or result in a denial.
If you’re dealing with a life insurance claim denial, please feel free to reach out to our support team. It’s best to get help sooner, especially where these claims can be so tricky. We will do our best to see if we can answer your questions.
You can call us toll-free at 888-732-0470 or click here to request a free consultation.