You purchase a life insurance policy to provide money to your family or heirs at a time when they most likely could really use the cash. Having a claim denied by the insurance company defeats the purpose of buying the insurance protection. There are just a few valid reasons why a claim could be denied, so read through the policy to ensure you understand the terms so that your survivors aren't left with a worthless policy after you die.
If the life insurance application was fraudulently completed, the life insurance policy can be cancelled by the insurance company at any time or a death claim can be denied. A fraud occurs if the insurance buyer knowingly lies about or omits information that could have changed the approval results from the insurance company. There is no time limit on a denial due to fraud. If you are buying life insurance, you should complete the application yourself and answer all of the questions truthfully and carefully.
All life policies include a suicide clause that allows the insurance company to deny a claim if the insured person kills himself. The time limit for a suicide clause must follow state law, which is two years in most states. This means that two years must pass after the coverage is taken out. Thus, if the insured dies more than two years after the policy goes into effect, the insurance company must pay the claim, even if the insured took his life.
Period of Contestability
During the contestable period on a new life insurance policy, the insurance company retains the right to cancel the policy or deny a death claim if it finds any errors or omissions on the application. The contestable period is usually two years after the policy goes into effect. If death occurs during this time, the insurance company will take a very close look at the application. A claim can be denied if errors are found -- even if those errors do not relate to the cause of death.
Listed Policy Exclusions
Exclusions are causes of death listed in the insurance policy for which a death benefit will not be paid. Common exclusions include death incurred during the commission of a crime or from an act of war. Insurance companies set their own exclusions, so it is possible to buy life insurance with few or no exclusions. A company may add an exclusion to cover a specific career or avocation. For example, if you state that you go sky diving, the insurance company may either exclude death from jumping out of an airplane or charge a higher premium to cover such a higher risk.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.