Do Life Insurance Companies Pay Out Claims?

Do Life Insurance Companies Pay Out Claims
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    Your worst nightmare. You’ve faithfully paid your life insurance premiums for decades to protect your family. You pass away and now the time has come for your family to get financial protection with your policy’s death benefit. So, will the life insurance company pay out the claim to your loved ones? 

    Do the top life insurance companies pay out claims? In most cases, the claim will be paid unless you’ve overlooked some of the clauses that might prevent payment. This goes for the big companies as well as the “small” ones.

    We are going to discuss how to make sure your policy will pay out when the time comes and why the company might deny a claim.  We will also discuss what recourse, if any, might be available to your loved ones to make sure they receive the death benefit.

    How is life insurance paid out to beneficiaries?

    Normally, life insurance benefits are paid when the person insured has passed away.  His or her beneficiaries must file a death claim with the company and provide a certified copy of the death certificate.  

    Most states allow insurers 30 days to review their claim and then they can either pay it, reject it, or ask for more information.  Upon the insured’s death, insurance companies have between 30 to 60 days after the submitted claim to pay out the death benefit.

    Life insurance claims are paid out most of the time

    Unfortunately, some life insurance companies have been given a bad rap about not paying out life insurance claims.  The bad press manifested from a few high-profile cases and has managed to stick to insurance companies ever since. 

    In reality, the horror stories are not common. Life Insurance companies are more than willing to pay out on legitimate claims and in many cases, will go the extra mile to ensure the claims are paid in a timely manner.  When an insurance company denies a claim, the reasons are valid and solely based on hard evidence. Therefore, it’s really important that you understand the various clauses, often referred to as exclusions, that might be in your policy before agreeing to sign on the dotted line.

    That said, the burden of proof for denying a claim is squarely placed in the laps of the life insurance company, not on the beneficiaries or the person who was insured.

    Why Would A Life Insurance Company Not Pay A Claim?

    When you are accepted for a life insurance policy, you are signing a contract with the company.  Always read the “fine print” before signing off on it.  

    Carefully reading through the policy, you might find there are exclusions for various circumstances that could deny your beneficiary payment after you have passed away.

    That said, never take out a life insurance policy believing your loved ones will receive the money you requested with no questions asked.  Reading the “fine print” is the best way to know if everything will be ok when you pass away.  There are several specific reasons why a life insurance company will not pay on a claim.

    11 Reasons why life insurance companies won’t pay out a claim

    Let’s go over the top 11 reasons when a life insurance company will not pay out a death benefit.

    1. Committing suicide

    The number one reason a life insurance company will not pay out on a claim would be if you committed suicide.  There is usually a clause in your contract, depending on the state you live in, that will clearly state that if you commit suicide within a set time frame of your insurance policy, your beneficiary will not get the death benefit, but they will get the premiums returned that have been already paid.

    The suicide clause is incontestable and it’s in a period of time when the insurance company may investigate and deny claims.  Depending on your state, the constestability period can be one or to years and kicks in as soon as your policy goes in to effect.

    This protects insurance companies from people who deliberately take out enormous policies, then commit suicide to ensure their families will be financially set.  As unbelievable as this act might seem, there was a time when more people than you can imagine would commit suicide. Since then, there is now a clause in place to protect insurance companies.

    2. Smoking

    The fact is, if you left out and did not let the company know that you are a smoker, your beneficiary can be denied payment.  Should the company find out within the time frame of one or two years, they are within the rights to cancel your policy.

    Keep in mind, when applying for life insurance, the company will ask if you smoke.  If you used to smoke but do not anymore, they will ask how long have you gone without smoking. They will ask how long you’ve not smoked because the effects of smoking can last for a long time. The type of product is important too. Some companies will look at cigarettes, cigars and chewing tobacco differently.

    Your classification as a non-smoker can be satisfied by not smoking for a few years but even that depends on the insurance company.  In many cases, the company will state that in order to be classified as a non-smoker you must not smoke for the next 5 to 10 years.

    3. You participate in dangerous hobbies

    There are certain professionals who have contracts that will not allow them to take part in dangerous activities such as skydiving.  In many cases, these contracts apply to professional athletes or even actors while they are involved in making a movie which states that they can’t participate is specific hobbies or activities.

    Well, the same applies to life insurance policies.  The bottom line, life insurance is about risk management.  

    If you spend your weekend SCUBA diving or skydiving, the company could deny or rate you based on the activity, frequency, and other details.   

    They might see you as a high risk vs someone who would never dream of jumping out of a plane.  You must be honest on your application regarding any dangerous hobbies you are involved in or other dangerous lifestyles.  As long as you list these activities on your application, you can still be approved for insurance,  but you will have to pay for that protection.

    4. Committing a crime

    Without a doubt, this is just common sense!  If you were involved in any illegal act by committing a crime, your life insurance provider will most definitely deny payment. In other words, if you are killed while committing a crime, your beneficiary will not get paid the benefit, period!

    What about this scenario?  Let’s say you are doing something illegal but you don’t know it?  For instance, you are hiking and accidentally walk on private property!  Trespassing is illegal, even if you are not aware you are committing the illegal act.  

    So if you’re on someone’s private property and die from slipping & cracking your head while being chased by a guard dog, your claim could be denied.  It would be well worth your time to find out if your beneficiaries could contest the denial.  For instance, there were no posted signs saying “No Trespassing”.

    5. War

    Understand, this clause is not intended for soldiers!  Some insurance companies have an Act of War exclusion in their policies.  This clause is intended for civilians who are killed in wars such as journalists who are reporting news from a war and are often regularly in a battle zone.  Also, people who travel to dangerous places in the world where battles and conflict are commonplace.

    6. Leave the United States

    This is a clause that could be very easily overlooked.  If you take out a life insurance policy while living in the United States and then move to another country, and you die while living there, this clause could deny payment.  Read through your contract, very carefully, to make sure this clause is not a part of your policy.  This could be very important if you are planning to live outside the United States permanently or for a given period of time.

    7. Committing an act of fraud

    Remember, when applying for life insurance, being honest is the only way to go.  Keep in mind, if you die, the life insurance company will investigate your cause of death and that’s just a fact!  

    They will look into the situation that led to your death and then bounces it off your original application.  If they discover you left out a health issue or you are involved in a dangerous activity, all the way back to the time you applied, they can deny payment to your beneficiary.

    8. If  You Die During The Contestability Period

    The contestability period starts as soon as your policy goes into effect.  This is a short period of time when an insurance company can investigate and then deny a claim.  The period of time is either one year or two years, depending on the state you live in.

    The incontestability clause prevents the company from depriving coverage due to a false statement, by the insured, after a certain period of time.

    During the application phase, if you gave the wrong information, your provider can deny benefits, even if your wrong information had nothing whatsoever to do with your demise. Even if you left out a preexisting condition but you were run over by a train, they can still deny your beneficiary payment.

    On the other hand, if you believed you saw your doctor 6 months ago, but actually it was 12 months ago, it will not prevent your beneficiary from receiving payment on the claim.

    On the creepy side, if the insurance company determines that the insurance policy was taken out in order to murder the insured and collect the benefit, they will be denied even after the contestability period.  This only seems to work in old movies or even new movies!  That said, taking out policies for such macabre reasons are not as rare as you might think!

    What Happens If You Die During The Contestability Period?

    Should you die during the contestability period, your insurance company will investigate and see if you provided them with the right information when you applied for insurance.  If you lied about something, they could possibly deny your beneficiary payment, even if your death had nothing to do with the wrong information.  If you live past the contestability period, even a mistake will not prevent benefits from collecting.

    9.  Your death is not covered in the policy

    Life insurance companies, at one time, had many exclusion clauses within their policies  If you died while performing a dangerous activity, or as a civilian, you were killed in a war, you would fall under this exclusion.

    Today, the most common life insurance policy exclusion is the suicide clause that we previously mentioned.  That said, in many cases, the suicide exclusion will be waived if the death happened after the contestability period that was added to the policy.

    In addition to the contestability period, you also have a material misrepresentation clause that lasts the life of your policy.  This clause refers to intentionally keeping information from the insurance company that could have caused your application to be denied.  In other words, you lied on your application in order to be approved for life insurance.  For example, if a claim has already been filed but you were still smoking.

    10. You Did Not Disclose Pertinent Information

    In most cases, the reason an insurance company will deny benefits, you failed to give proper information for them to gauge your level of risk for the policy payout.  If you did not answer honestly, that will be enough to deny your claim.  That said, not every mistake is grounds for denial.  If you accidentally wrote down the wrong address or you messed up your driver’s license number, these are considered just mistakes, not intentional fraud.

    There are situations that will deny benefits or reduce payment significantly, even after the contestability period has ended.

    When it comes to health questions, if you have high blood pressure but never claimed it and then you are killed in a car accident within the time frame of one or two years, the insurance company could say it’s plausible you actually died from high blood pressure, not the car accident.

    Another example is if with your driving records. If you did not include a conviction for driving under the influence (DUI) you could be denied but only if it’s during the contestability period.  After it ends, normally you would not be denied the claim. If the insurance company discovers that you had a doctor lie for you regarding your health, you will be denied benefits.

    11. You stopped paying policy premiums

    If your premium lapsed, you can’t collect on the policy.  Insurance companies are very strict about the terms of a policy.  That said, there are older people who will develop memory issues that can cause a payment to be missed.  Typically, policies have a grace period, which is at least 30 days, to get the payment applied to your policy and will not be charged interest.

    One way to protect yourself, have your payments deducted automatically from your bank account.  If you have a policy with a cash value, such as whole life, you probably have a provision that will allow you to borrow from the policy value to make payment on the premium.  This will only protect the policy as long as there is a sufficient cash value in place.

    How To Keep Yourself Out Of Trouble

    1. Never lie when applying for life insurance

    As much as it might seem a good idea, never lie on your application.  If you smoke, say so.  If you used to smoke but have quit, say so.  If jumping out of airplanes is something you get off on, say so.  If you die within the first 2 years of your policy and the insurance company finds out about your lack of information, they could very easily deny your benefits to your loved ones.

    2. Understand the application questions

    The questions for the application can be really long and often confusing.  Take your time and answer them correctly, not quickly.  You could make a mistake that could cost your family their well-deserved benefits.  Many people rush through the questions regarding medical issues and then discover they’ve left out valuable information.

    3. Get help

    Make sure you work with an independent life insurance agent who will take the time to get all your questions answered. Once you and your agent have filled out the application, take your time and read it over to ensure everything is correct.

    Contesting The Company’s Decision To Deny Claims

    If your beneficiary believes that they were denied their life insurance claim, they should contact the company and find out what their appeals process is.

    If the beneficiary can show that the decision was incorrect, it could be easily handled by the administration branch and not go to court.

    He or she should seek legal advice to ensure they know their rights before contesting the denied claim.

    Trying to get an insurance provider to change their decision can be an up-hill-climb. Get your attorney involved because insurance companies will then take these claims a lot more seriously.

    Do Life Insurance Companies Pay Out Claims?

    Yes, life insurance companies pay out their claims. Just remember to be honest when applying and understand your policy before putting it in force. Thanks for reading our article, Do life insurance companies pay out claims?

    To learn more about life insurance, make sure to visit our page Life Insurance 101 or find out how much you may end up paying for coverage on our Life Insurance Rates by Age page.

    Michael Quinn

    Michael Quinn

    Michael is a licensed life insurance agent, expert & owner of Life Insurance Blog. LIB has helped thousands of shoppers understand life insurance and secure affordable coverage.

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