Does life insurance really pay out?
Some people wonder, “If I get life insurance, may I be confident my loved ones will get the money I intended for them?” In this article we’ll look at the exceptions, reasons life insurance companies refuse claims, and how you could help make sure your beneficiaries get the benefit of your life insurance policy.
Majority of life insurance policies pay out
In 2023, 52% of American adults owned life insurance1. In 2022, life insurance companies paid more than $321 billion in benefits2. (2023 benefit data is not yet available via iii.org.)
People get life insurance with the expectation that if they pass away during the period of coverage, their policies will help their loved ones financially. But there are times when a company has no choice but to decline to pay a death benefit. There are very specific—and avoidable—reasons policies aren’t paid. Understanding them can help you head off a problem for your loved ones if and when they need to collect on your life policy.
Reasons life insurance claims are denied
1. Failure to pay premiums
This is the number one reason claims are denied. Premiums (the money you pay the insurance company for your coverage) go unpaid for several reasons. Sometimes people simply forget to make payments. Other times, they decide they don’t need the coverage and stop paying. Sometimes they want to pay but can’t come up with the money. In most cases, the insurance company will give the policyholder a “grace period” (generally 30 days) to catch up on a payment. After that, however, the coverage will be cancelled, with or without notice from the company. Too often, beneficiaries file a claim on a life insurance policy of a loved one they’ve lost only to find that their loved one stopped paying on it months or years earlier. If you’re struggling to pay your life insurance, contact your company and see if they can work with you to keep your policy in force.
2. Undisclosed health issue
Failing to tell the insurance company about a health issue you know you have—say, high blood pressure, a smoking habit, etc.—could also result in a denial of your claim, even if the cause of death is not directly related to the health issue you failed to report, and even if the contestability period is over. In legal and insurance terms, that is known as “material misrepresentation,” and chances are there’s a clause in your policy that deals with it. It’s very important to answer all the questions the insurance company asks truthfully and to the best of your ability. It’s better to pay more for coverage than to have the protection you’ve been paying for denied because of an issue of this kind.
3. Suicide
Most life insurance policies contain a suicide clause that states the insurance company does not have to pay the claim if the person covered dies by suicide within a given period of time—usually, one to two years from the date the policy goes into effect. If the death comes before that period is up, the beneficiary gets only the money the policy holder paid into the insurance policy, not the larger death benefit the policy owner intended for the policy to pay.
4. Cause of death not covered
Most policies state “exclusions”—causes of death not covered by the life insurance. Suicide is one example. A more common problem is that the policy purchased was not intended to cover all manners of death.
Often life insurance policies will exclude coverage for practices and hobbies that are considered high risk—skydiving, for instance. An “Act of War exclusion” applies to people who spend significant time in countries where armed conflict is taking place. If someone dies while doing something illegal, the insurance company may deny the claim. And some policies won’t cover you if you buy them in the United States but are living outside the country when you die.
Check your policy to see if any of these apply. It’s important to know what kind of coverage you have and make sure it matches with the kind of coverage you want.
Don’t forget to list your beneficiary
Here's a scenario: Great Uncle Al told you he wanted you to get the money from his life insurance policy. But he passed away without making it official with the insurance company. In this case the insurance company will pay the claim, but the money will go to his estate, not to you. After a long and fairly involved legal process called probate, you might eventually get the money, but the whole hassle can be avoided simply by making sure beneficiary designations are up to date.
Ask questions and review your policy
When you sign up for life insurance, you’re signing a contract. Like all contracts, you should read your policy closely so that you understand what it does and doesn’t cover. That and making sure your beneficiaries are up to date will help make sure your loved ones get the life insurance money you want them to have.
