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You typically buy life insurance in order to protect and help your family financially should you pass away. It can also play a key role in financial planning, as a policy’s proceeds can be used for anything from income replacement to paying off a mortgage, or even for the care of a special needs child. Depending upon the type of life insurance policy you purchase, and your health, premiums can range from several hundred dollars each year to several thousand.
Given the fairly substantial investment you may make in life insurance, it’s important that you feel confident that your beneficiaries will actually receive the policy’s death benefit--the amount of coverage you actually purchased--should you die while the policy is in effect.
Unfortunately, under certain scenarios, your life insurance policy actually may not pay your family, and these situations aren’t always fully understood. Below we outline some common reasons a life insurance policy might not not pay a death benefit, to help you and your family buy and plan your insurance accordingly.
Almost every life insurance policy comes with a suicide clause that extends for a period of time after you’ve purchased the policy, usually two years. If you pass away during this period of time and your cause of death is determined to be a suicide, the insurer can reject your family’s life insurance claim. However, if you pass away after the clause is in effect, your family likely would receive the policy’s death benefit
There are some restrictions, depending on the policy, so it’s important to note if your insurer’s suicide clause extends for a longer period or has any other specifications. Also, if you purchase a new life insurance policy, or replace one you already have, the suicide clause restriction will go back into effect.
An incontestability clause is included in nearly every life insurance policy, and it’s actually required in many states. This clause allows the insurer to contest a claim if they have evidence that you (knowingly or unknowingly) misrepresented personal information in your application, died during an illegal act (such as using drugs), died from alcohol abuse, or your passing was linked with other scenarios in which you may have contributed to your own demise.
This clause is similar to the suicide clause in that it allows the insurer to contest claims for two to three years after the policy was purchased and, if their action is successful, deny your family a death benefit or reduce the payout to a very small sum.
On the positive side, after the contestability period, your life insurance company will generally not be able to deny a claim for any of these reasons. They would then have a much higher barrier to denying a claim, such as proving fraud on your part (a stipulation that is always excluded in a policy).
Insurer-Specific Policy Exclusions
When you purchase a life insurance policy, the insurer or their representative is obligated to make clear any policy exclusions. This is particularly important when the insurer has exclusions that are particular to the policies they write, and not consistently used across the industry, as you’re less likely to be aware of them otherwise. This issue came up recently in the context of auto-erotic asphyxiation, as death from this cause is excluded specifically by AIG’s life insurance policies.
Waiting Periods for Guaranteed Acceptance Insurance
Across insurers, certain types of life insurance policies regularly come with their own exclusions. Guaranteed acceptance whole life insurance policies, for which a medical examination is not required, are particularly problematic in this regard. Every such policy has a waiting period, a fact about which a fair number of policyholders and beneficiaries may be unaware.
Since guaranteed life insurance is literally “guaranteed”, insurers that offer this policy will accept all applicants. In order to limit their losses from customers who are terminally ill, or otherwise likely to pass away in short order, each policy has a waiting period during which, if you die, your beneficiaries would only receive the sum of premiums paid, along with interest on those payments. The only exception is for deaths that are deemed to be accidental. The waiting period varies by company and is important to note, particularly if you’re already sick. For example, while Colonial Penn has a 2-year waiting period, some insurers like Americo and Columbian Financial extend their waiting period to 3 years.
This content originated with ValuePenguin.