Having a life insurance policy is one of the best ways to ensure the financial security of your family after your death. But if you're not careful, your survivors may never get the pay out they deserve.
Here we explain five mistakes to avoid so that your beneficiaries get what they're owed -- no matter what type of life insurance policy you have.
1. Lying on your life insurance application
They say the truth hurts, but it can hurt even more if you lie on your life insurance application. While it may be tempting to deny that you're a smoker, or that you've been treated for a particular disease or medical condition, you could find your policy null and void.
If your life insurer finds out you lied, it's considered "material misrepresentation," and your application for life insurance will probably be denied.
If the policy has already been issued, there's typically a two-year contestability period. If your insurer finds out during that time that you've lied, the policy may be canceled or you might face higher premiums.
If the lie is particularly egregious, the insurer could deem it fraud, even after the two-year contestability period is up, and the policy could be rescinded.
2. Failing to pay and letting your policy lapse
Just because you miss a payment doesn't mean your policy is dead in the water. Life insurance companies typically offer policyholders a 30-day grace period for payment, and some companies extend that to 60 days. During that time your policy will still be in effect.
The important thing to remember is if your policy lapses and is not in force when you die, your beneficiaries are out of luck.
3. Failing to tell loved ones about your life insurance policy
If you never tell your beneficiaries about your life insurance policy, it doesn't mean the insurer won't pay them after your death, but it does make it a more difficult process. While most life insurance companies conduct database checks for the death of policyholders so beneficiaries will get paid, not all of insurers do so in a timely manner. That's why it's wise to be sure your loved ones know about your policy and where to find it after you're gone.
In some cases beneficiaries are unaware they are named on a policy, and proceeds go uncollected for years because some insurers are not diligent about tracking down survivors of policyholders. Several large companies, including Prudential, AIG, Lincoln Financial and others, have recently entered settlements with states to improve their practices. Legislators are also addressing the issue, with eight states, including Maryland, New Mexico and New York, among others, passing laws that outline the steps companies are required to take to find people owed benefits.
4. Not naming a secondary and final beneficiary
It is important to name secondary and final beneficiaries. If your primary beneficiary dies before you, policy proceeds will go to the second beneficiary you have listed. If the secondary beneficiary has passed away when you die, then the death benefit goes to the final beneficiary.
If you don't have anyone waiting in the wings, it doesn't mean the money disappears. In that case the proceeds will go to your estate. However, if the estate is subject to probate, your survivors may have to wait a long time to get the death benefit.
5. In some cases, death due to risky behavior and suicide
Life insurance policies typically have a two-year exclusionary period for suicide, so your beneficiary typically would receive whatever you paid in premiums, but not the policy's face amount. So-called "suicide clauses" vary by insurer and are designed to discourage people from buying life insurance when contemplating suicide.
If you're involved in criminal activity, and you're killed while committing a crime, your beneficiary will still receive the proceeds from your policy.
However, if you don't disclose to your insurer when you apply for a policy that you have a high-risk hobby, such as sky-diving or auto racing, and you die while doing it, your insurer may decline the claim.