The surest proof that life insurance policies pay is that people still buy them. However, there are certain instances when they don't pay. Read on to find out what every life insurance applicant should know and under what circumstances they should expect no payout to occur. (Read Life Insurance Distribution And Benefits for the basics of setting up your policy.)
Every life insurance contract contains a section that outlines the incontestability period. This is a designated period of time normally two years, though it may vary during which the insurance company is legally permitted to challenge the policy's validity if it believes that the policyholder did not fully disclose information on his or her application. (Read Understand Your Insurance Contract and Exploring Advanced Insurance Contract Fundamentals to ensure you know the kind of coverage you're paying for.)
Even though you saw a doctor for a physical and an EKG, and even though an examination report has been procured, insurance companies still lean heavily on the information they receive from applicants before issuing policies. That means any errors found in applications, whether due to oversight or fraud, could lead to a withdrawal of that policy or a denied claim if the information would have caused the insurer to withhold the policy or rate it differently. (How do you rate as an insurance risk? Read Insight Into Insurance Scoring to find out.)
If the policy is still in force at the end of the incontestability period, the company is liable to pay full benefits - even if inaccuracies or misstatements are found. This applies, of course, in all cases excluding fraud.
Insurance policies also include a number of "policy exclusions" that outline further reasons why they won't pay upon the death of the insured. Below, a number of these are listed and described. Remember that not all policies will include all exclusions and that not all exclusions are listed below - just those that crop up most often.
The first reason why insurance companies won't pay is suicide. That doesn't mean they never pay in cases of suicide, but they will exclude those situations outlined specifically in the suicide clause of the policy. In most cases, a suicide clause stipulates that payouts will not occur if the insured takes his or her own life within two years of when coverage begins. (Read about this and other important clauses in Life Insurance Clauses Determine Your Coverage.)
Acts of War
An act of war refers quite simply to the death of the insured as a non-combatant in a war. Most insurance policies deliberately define the term "war" very broadly, to include "declared or undeclared war," "civil or international war" or "armed conflicts between organized forces of a military nature."
The bottom line here is that underwriting (the science of predicting an insurable event, such as death) cannot accurately account for extraordinary events like wars. It therefore excludes them from insurance policies altogether. For most applicants, this may not appear to be a relevant an issue. But it could be, particularly because much depends upon the way governments define wars and less clearly defined events, such as the WorldTradeCenter attack. If you have questions about this issue, it's best to get precise answers from the issuing company regarding what circumstances will deny your beneficiaries their payout. (Learn more about the role of underwriters in Is Insurance Underwriting Right For You?)
Death in Active Military Service
This exclusion is somewhat clearer than the previous one, as it pertains directly to those in the armed services, or who join the armed services subsequent to taking out an insurance policy. For those who are considering putting on the uniform, know that a civilian policy may not leave your beneficiaries with anything in the event of your passing. However, most armed services do provide benefits to dependents who lose a loved one in a war. (Joining the service can impact your retirement planning as well. Read Benefits For Members Of The Armed Forces to learn more.)
These are activities and "extreme" sports that in the eyes of insurance companies are too dangerous to insure. So, if you're an alligator wrestler, ultimate fighter, skydiver or the like and you lose your life in the process, it's not likely that your heirs will benefit from your policy. Thrill-seekers of every stripe should carefully consider this exclusion, and ask themselves if that rock-climbing or helicopter-skiing excursion is really worth the risk.
Death in a Restricted Country
The final exclusion found on most contracts pertains to a policyholder who dies in a country where either disease or conflict regularly claims the lives of the local population. If one neglected the proper vaccinations and fell ill and died in such a country, benefits would be withheld.
Those who must travel to such destinations for business, religious or other reasons can add a policy rider to the contract to ensure payout in the case of death, usually for only a slight increase in premium. (Learn about different types of riders and how they can benefit you in Let Life Insurance Riders Drive Your Coverage.)
Everyone should review their insurance policy regularly and be familiar with all its terms, conditions and exclusions. It's even more important to know what's expected of you to be in compliance with these terms and conditions. If you're in doubt, consult your advisor and have any vagaries clarified in writing. It would be a shame to pay a lifetime's worth of premiums only to have your loved ones left empty-handed.