Life Insurance Claim Rejected

The death of a loved one is a difficult time, and worrying about finances only adds to the situation. Life insurance is a way to help ease the financial burden by replacing a loved one's earnings that cease at death.

Once a life insurance policy is purchased, many think they have solved this financial problem. But the purchase of a policy doesn’t guarantee that the death benefit will be paid. Insurers examine the terms of policies carefully before paying claims. Here are some common reasons why the proceeds from a policy aren’t paid to the beneficiaries.

Incontestability Clause - Most life insurance policies have what is called an incontestability clause. This allows the insurer to deny paying a claim if the insurer finds that the applicant made misstatements on the application and subsequently died. The period for examining the information on the application is usually two years from the purchase date of the policy. However, if the applicant deliberately tried to defraud the company, there is essentially no time limit. If the applicant violated the policy terms, the beneficiaries may receive nothing.

Suicide Clause - If the cause of death was suicide, the insurer may not pay the claim. The suicide clause usually says that no death benefit will be paid if the insured’s death results from suicide within two years of the inception of the policy. Be careful here when you replace an existing policy with a new one. If a policy owner replaces his or her existing life insurance with a new policy, the suicide clause may start all over again with the new policy. Keep in mind that it often isn’t easy to tell whether a death is a suicide or an accident. It takes time to review by the insurance company and delays the payment of benefits, if it is determined the would-be recipient is eligible.

Policy Lapse - Another cause of companies not paying death benefit claims is simply that the policy owner didn’t pay the premiums, or in the case of term insurance, the time frame for the policy ran out. Insurers generally let the policy owner know that a policy is about to lapse and when one is going to expire. Some have a grace period during which the premium can be paid. The grace period typically runs 30 days. If payment is made during this time frame, the policy is reinstated.

If the policy is a whole life policy, for example, the owner may be able to borrow against the cash value to pay the premium. This is something to check for in individual policies.

Group Insurance - Another example is group life through an employer plan. This coverage may be in effect while the insured was working, but once he or she left the company, it went away and was never replaced.

There are things that can be done to help make sure the insurer will pay a death benefit claim.

Review the insurance application and be honest with the answers before submitting it to the company. Do not withhold any information even if you think it isn't pertinent.

Pay the premiums. You may want to name another individual to receive copies of the premium notice if the policy is about to lapse. Make sure to let the insurance company know if you move or change financial institutions from which your payment is coming.

If your policy is group life insurance through your employer, make sure it is still in force at least once a year. It is a good idea to see if the coverage can be converted at a cost-effective rate to an individual policy if you should leave the company.

If you are denied, most insurers have an appeal process. Review this carefully and consider whether you need legal representation during this time.