The Fine Print in Life Insurance - Buyer Beware
Are you worried your life insurance company will deny or fail to pay your claim based on their “fine print?”
Your concern may be justified.
...or maybe not.
And since so many clients and prospects ask us about the fine print in life insurance, we've put together the following guide to help you avoid a denied claim.
Here’s what we'll cover in this post:
Quick Article Guide
Here’s what we'll cover in this post:
First, a General Statement about Your Life Insurance Contract
Life insurance policies are legal contracts between the insurance company and the person insured. They are written on “good faith” that both parties are being honest and truthful with one another.
Once a policy has been approved, it is the insured person's right to accept or reject the contract under the conditions spelled out within the insurance policy. Additionally, each state has their own department of insurance that regulates the way these contracts are written.
They also review policies to verify that each contract adheres to the state's specific standards. If by any chance there is any type of ambiguity in the contract, the outcome will always favor the person insured.
Common Life Insurance Clause - The 2-Year Contestability Period
Every policy has a contestability clause, which you should probably understand.
Simply put, if an insured person dies within a specified period of buying a policy (the period is typically 2 years), the insurance company has the right to contest paying the claim if they can prove fraud on the original application.
Example of a Fraudulent Life Insurance Purchase
For example, let's say in 2021, a 30-year-old man with a heart defect buys a policy, doesn't mention his pre-existing condition to his agent, and lies about his health history on his application.
The company doesn't pull medical records since he is young, and therefore, never finds out about this condition, and approves and issues his policy. In 2022, he is tragically killed in an accident.
Being inside the 2-year contestability period, the company would order his medical records, find out that he had a health history, and would have every right not to pay the claim.
The contestability clause by definition is:
A provision in a life insurance policy setting forth the conditions under which the insurer may contest or void the life insurance policy. After that time has elapsed, normally two years, the life insurance policy cannot be contested for any reason other than non-payment. This is different from a guaranteed issue policy (non-medical), where there can be a two or three year waiting period until full death benefits are available.
How Can I Make Certain They Won’t Contest My Family's Claim?
Obviously, you can’t contest the insurance company from the grave.
So how do you keep them from contesting your family's claim once you’re gone? We all want to make sure our loved ones get paid as we intended! So how do we make certain?
When speaking with your insurance agent make sure you disclose all facts about your medical health profile. Be precise not to leave out even the smallest of details, as they can make a difference in underwriting.
It’s your life insurance agent’s job to take the time and gather all the facts about your health profile before they make a recommendation. If your policy is approved, and issued at the incorrect rate class due to either a material misrepresentation or concealment, the claim may be contested by the insurance company within the first two years.
If the misrepresentation is something that would cause the person to have been declined in the first place, then the insurance company can deny (not pay) the claim.
Their solution isn't always to deny a claim if there is a discrepancy, however. If it were something that would cause the insured be rated at a higher cost than that may be deducted from the death benefit. Remember, this only applies to the first two years.
A Hypothetical Example
Another completely hypothetical example would be a case where a 33-year-male old client applied for $1,000,000 policy, and was approved for non-tobacco rates paying $1,000 annual premiums.
This client purposely failed to mention tobacco use (cigarettes) to his agent when filling out the application. The client was able to pass the physical exam with flying colors, and nicotine didn’t show up in the urine sample.
The insured had stopped smoking for a week prior, in hopes of qualifying for non-tobacco rates, which he did. Had he qualified for tobacco rates, his policy would cost $2,000 annually!
A side note: insurance companies will not always look into medical records if there is no need prior to issuing a policy. Let’s say in this case that they did not. This is where “good faith” comes in to play.
The insurance company has approved and is issuing the policy on the good faith that the application was submitted with full and correct information. The insured failed to mention that they are a smoker, which caused the insurance company to approve them as a non-smoker.
If this client passes away within the first two years, the insurance company will do their due diligence and research the medical records to see if anything was misrepresented.
Let’s say the insured passed away after the first year due to undetected kidney cancer.
If in the medical records they are able to prove that the insured was in fact a smoker and did not disclose this information, then the insured was approved under false pretenses and was paying incorrect non-tobacco rates.
In this situation, it would often not void the contract, and in fact they would likely pay the death claim. However, the death benefit would be reduced by the amount of premium not paid ($2,000-$1,000=$1,000) to the insurance company for the tobacco rates. The death benefit in this example would be reduced by $1,000 to equal $999,000.
To make a long story short, make sure you’re honest with your agent so they can be honest with you. You don't want your family trying to explain your "inaccuracies" to a claims adjustor while grieving your loss.
For legit ways to save on life insurance, read our Affordable Life Insurance insider tips.
Common Life Insurance Exclusions and LimitationsDoes life insurance cover suicide?
If I had been asked this question seven years ago, prior to being a life agent, common sense would tell me no. Well, that’s not the case! It’s actually a covered death after year two, and it’s a question I get a couple of times a week.
Every year I run an audit of all of my existing business in force. And every year, I come across a few death claims that have been paid - sadly, of those claims, there’s always one that is death by suicide.
Is there an “act of war” or terrorism exclusion?
The answer is, it does not exist in life insurance!
And I’ve never seen an act of war or terror exclusion written into any current life policy. This also holds true to accidental death (AD&D) policies.
However, it does exist in Property and Casualty policies (P&C) like your home insurance policy. Insurers have those specific clauses to protect them against catastrophic loss so they’re not wiped off the map in one shot.
Accidental Death Policies - Beware!
Accidental death policies cover accidents, nothing else!
They do not cover death due to natural causes or medically related causes.
Intentional or Illegal Acts
Furthermore, if you look in the fine print of most accidental policies, they say that claims will not be paid for intentional or illegal acts. Most of them also specify that you cannot die while under the influence of any drug or alcohol.
So what does this mean?
It means you cannot drive drunk and take out three city blocks including yourself. They will not pay that claim! You cannot rob a bank, get taken out by the S.W.A.T team, and expect your family to get paid. Crime doesn't pay!
Please note that while accidental policies commonly have these crime and illegal acts exclusions, most fully underwritten policies do not.
Your best bet, if you're looking for a policy to pay out, is to buy a policy where you take a exam, disclose everything about your personal health history, and to speak to a knowledgeable agent who can find you the best price best on your particular circumstances.
Silver Lining for Accidental Policies
However, accident death policies do provide this benefit:
They are quick and easy to buy. You can be covered with one phone call to your agent as there is no medical exam or medical questions to answer.
Some people are medically uninsurable and would not otherwise qualify for underwritten insurance, or might be too young for a guaranteed issue policy (the youngest you can be is 50-years-old).
Truckers are perfect candidates for these policies, and sometime prefer these policies as they see fatal accidents frequently. It's a very affordable safety net for flying on commercial airplanes, often purchased by frequent flyers or those taking vacations outside the United States.
The benefit to having a fully medically underwritten policy is that it covers accidents as well as medical conditions, providing the fewest holes in your safety net.
For more information read our article about the Basics of Life Insurance.
Questions? We Can Help!
Want to make sure you understand everything in your policy, or looking to purchase a new one? Give us a call!
At JRC Insurance Group, we have helped thousands of families and businesses with their life insurance needs, and we can help you too! Our agency is licensed in all 50 states and we’re independently owned and operated.
As a non-partial, no-fee brokerage, our goal is match our clients with the best life insurance options available by shopping and comparing rates from 63 highly-rated insurers. By having access to dozens of companies and their guidelines, we’re able to save our client’s time and money.
Most importantly, our services as completely free, and there is no cost to apply for coverage. Give us a call toll-free today at 855-247-9555, or you can request a free quote online to compare rates and options from dozens of insurance companies in less than a minute.
Chris is a co-founder of JRC Insurance Group. Prior to founding JRC, he owned his own agency, and he has been a licensed life insurance agent since 2014. Chris is a die-hard San Diego Padres fan, and in his spare time he enjoys reading, ping pong, poker, and spending time with his wife and three daughters.