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LIFE Insurance

Avoid these pitfalls to make sure your beneficiaries get what they're owed.

Mistakes that kill claims

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'll explain how to avoid oversights that would cause a life insurance claim to be denied.

What to do if your life insurance claim is denied?

If you feel that the insurance company does not have a reasonable cause to deny your life insurance claim, there are steps you can take:

  • Contact your insurer and request more specific information about the denial if you are unclear about the reasons or there is a lack of proof/documentation for the denial.
  • Contact your state department of insurance and attorney general. Typically they will offer guidance on the best way to appeal or contest a denied claim. These offices often have employees with insurance appeals expertise, and of course know state laws and regulations, so can be helpful.
  • Contact a lawyer who specialized in insurance law/settlements/appeals.

When are life insurance claims denied?

The reasons life insurance won't pay out to a beneficiary generally include factual errors in the application, failing to disclose medical conditions, mistakes in naming or updating beneficiaries and allowing a policy to lapse due to nonpayment. Well go over these life insurance claim denial reasons in detail so you can avoid them.

6 Mistakes that kill life insurance claims

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.

Life insurance companies consider these factors when setting rates -- or determining whether to insure you at all.

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. For instance, if you die from a smoke-related illness, but claimed you were a nonsmoker, a life insurance company may refuse a death benefit to your beneficiaries.

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. Some companies extend that to 60 days. During that time, your policy will still be in effect.

Even after the grace period is up, you usually can get your term policy reinstated, but if the lapse has been lengthy, you may need to undergo another medical examination.

If you have a permanent life insurance policy, the insurer might use the cash value in the policy to cover the premiums and prevent a lapse in coverage.

The important thing to remember is if your policy lapses and isn't 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. It does make it a more difficult process though.

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 life insurance companies have entered into settlements with states to improve their practices.

Legislators are also addressing the issue, with several, 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's 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.

6. You got divorced and you and your ex did not rename you as beneficiary

In some states, Illinois is one example, laws require that life insurance policies automatically drop an ex-spouse as a beneficiary after a divorce. That means you have to rename the beneficiary after the divorce. So if you're listed as beneficiary on your spouse's policy, you divorce but you both want you to remain as the beneficiary, you must notify your insurance company. 

However if the divorce decree requires one spouse to maintain a life insurance policy, which is fairly common, and the ex-spouse is the beneficiary, the divorce will not void that life insurance beneficiary designation.

Another notable exception is when the policy is through your employer's group life plan. 

If your life insurance is through your work, it’s likely that your life insurance falls under federal retirement income protection laws that would supersede state laws. In that case, your ex spouse would still be able to collect as a beneficiary without being renamed.