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Will My Life Insurance Pay Out?
Thinking about your eventual death or the death of a loved one is not particularly fun, to say the least. But if you are a regular reader of the OppLoans Blog, you probably know making end-of-life plans early on can save you and your loved ones from extra heartache once the inevitable happens.
One wise consideration to help prevent financial catastrophe after the death of a family member is life insurance.
On a basic level, a life insurance policy is taken out on a specific person and pays out upon their death. In exchange for regular premium payments during the individual’s life, a preset amount of money will be paid out from the insurance company to the designated beneficiary or beneficiaries. It can make a massive difference when it comes to costs associated with burial and medical debt, especially if the deceased was a primary earner.
Unfortunately, there are instances in which a life insurance policy may not pay out. It is important to familiarize yourself with those instances so you can minimize the odds of an unpleasant surprise at the worst possible time.
Less cause for alarm
First let us offer some good news after the initial gloom. While spending hours on the phone with an insurance representative shortly after losing someone you love would certainly be a nightmare, it is not as likely to happen as you might fear.
“We have done a lot of research into this topic, analyzing schedule F of a company’s statutory statements where they must report how many claims are resisted each year,” says John Holloway, licensed life insurance agent and co-founder of the digital life insurance brokerage NoExam.com. “After reviewing the schedule F report for many of the largest life insurance companies, there are surprisingly few claims that are resisted.”
When life insurance companies do resist paying out, the cause cited will often be misrepresentation by the policyholder.
“One of the easiest ways for life insurance to not pay out to your beneficiary is if you were not 100% honest when answering the health questions on your application,” warns Matt Schmidt, CEO of Burial Insurance Pro. “If you pass away in the first two years of a policy, companies will contest the death benefit, and further investigate your health. In the event the insurance carrier discovers a material misrepresentation, they may refuse to pay the death benefit."
There are a wide range of health questions you will be required to answer when you are applying for life insurance coverage. It may seem personal, but by being honest, you will lower your chance of issues down the line.
“If you lied on your application, withheld important medical or health information, or intentionally provided inaccurate health or medical information, then this would be considered fraud,” explains Randy VanderVaate, owner and CEO of Funeral Funds. “Fraud can include not including past or current medications, smoking or nicotine use, dangerous hobbies, or current medical conditions on your life insurance application.”
Noncovered cause of death
There are multiple kinds of death that will let the insurance company off the hook. You will have to read through your specific policy to familiarize yourself with all of the particulars.
“Some policies cover only some kinds of death,” says Kathryn Casna, a life insurance specialist with TermLife2Go. “Accidental death and dismemberment, for example, covers you only if you have an accident. If you die of cancer or heart disease, your beneficiaries will not receive the death benefit payout. If you want coverage for those causes, you will need to buy another policy.” Suicide or murder by a beneficiary may also void life insurance policies.
Many policies will not kick in immediately. It is vital to know if this is the case with your policy before you sign up for it.
“Some life insurance policies will have a waiting period whereby the contract specifically states that the insurance company will not pay out the death benefit for any nonaccidental death during this time,” says Anthony Martin, CEO and owner of Choice Mutual. “In general, a waiting period will last two to three years if there is one. For example, all guaranteed acceptance life insurance plans from any company will have a waiting period. Those policies have no health or lifestyle underwriting, so the issuing insurance company knows nothing about the health of the applicant. They have to impose a waiting period on those plans to prevent people on hospice care from buying them and collecting a big check within a few months.”
Remember your payments
Finally, the most obvious reason life insurance may not give you money is because you stopped giving money to them.
“If you do not pay the premiums on a policy and the contract becomes inactive, then the policy will not pay,” Martin clarifies. “You could have a policy for 20 years and never miss a payment. Then if you miss a payment and pass the carrier’s defined grace period, the policy will become inactive. If you passed away at this point, the carrier would not pay out the life insurance claim.”
No one wants to dwell on death. But dwelling on the specifics of insurance contracts and law after a death is not any fun either. Do your best to plan ahead as best as possible.
Kathryn Casna is a life insurance specialist with TermLife2Go.com.
John Holloway is a licensed life insurance agent and co-founder of the digital life insurance brokerage NoExam.com. He co-founded NoExam.com in 2013 with the goal of simplifying the life insurance buying process.
Anthony Martin is the founder and CEO of Choice Mutual, which is an online life insurance agency specializing in final expense insurance. He has been a licensed agent for almost 10 years and has personally placed more than 5000 policies in his career. Follow him @choice_mutual.
Matt Schmidt is a burial insurance advisor, who helps families across the country obtain affordable burial insurance policies. These specific end-of-life policies help families cover funeral costs and other final expenses.
Randy VanderVaate is president and owner of Funeral Funds based out of Dallas, Texas. Licensed in all 50 states, Funeral Funds specializes in affordable burial insurance, final expense insurance, and life insurance for people ages 50-85. His goal is to eliminate the financial burden that a funeral, cremation, or other final expenses place on family members after the death of a loved one. VanderVaate can be reached at www.funeralfunds.com.