Can an insurance company deny a life insurance payout?
If a person has only made 2 payments on a life insurance policy, is it justified for the insurance company to deny a payout? My uncle had only made 2 payments to the policy before he passed. We are now hearing that the insurance will not payout because it hasn't been at least 2 years.
I'm sorry for your loss, and sorry you are going through this process with an insurance company.
Sadly, there are some companies out there that do make it harder to collect benefits on their policies.
You mentioned that two payments were made on the policy, approved and delivered, which means the coverage was in force. If, on the other hand, this person has made two payments to the insurance, but died during underwriting from an ailment, that would have caused the application to be denied. I wouldn't expect the insurance company to pay.
Fast forward, assuming this person dies from something other than an undisclosed illness, then you should expect to receive the benefits of the policy. Especially if this is a good sized policy, I would expect many insurance companies will go back through the application, to make sure NO information was left off, or misrepresented by the applicant. They may try and get out of paying with even a small "white lie," or small omission.
As you surely have heard numerous times, there is a two year contestability period on almost all policies, so expect some pushback from the insurance company. But if you feel you are due the policy benefits, contact an attorney or the department of insurance of the state where the policy was issued.
Best of Luck.
First of all please accept my condolences. I’m sorry for your loss.
Further to your question, once a policy is issued, the first premium is paid, and all delivery requirements are signed, the policy is in full force and effect. There are many instances where an insured died the day the premium was paid and the carrier paid the claim, as they must.
However, all life insurance policies have a two-year contestable period. During this time the carrier may ‘contest’ the claim and deny payment if there has been a “material misrepresentation” of facts. Some examples would include non-disclosure of health issues such as tobacco use, etc. Furthermore, suicide is an exclusion if occurring in the first two policy years. Thereafter these issues are, generally speaking, non-contestable.
It’s possible that the carrier has not denied the claim so much as they are investigating the circumstances. That is not unusual. During this time the carrier will perform a thorough evaluation of all facts. Presupposing there are no adverse findings, the claim should be paid.
If the claim is denied, you’re entitled to an explanation. In today’s information age, it is difficult for a proposed insured to ‘hide’ any adverse history. If the claim is denied, and depending on the size of the claim, you may consider hiring an attorney experienced in these matters.
Next steps for you should be to confirm if they have in fact denied the claim or are still investigating it in accordance with the contestability clause in your uncle’s life insurance contract. If they’re contesting the claim, then I encourage you to be vigilant in staying informed and patient with the process. If the claim was denied, then obtain a detailed explanation of the reasons for denial. If you disagree with their decision, then see if you can appeal it and or consult with an attorney competent in these matters.
Thank you for the question and I sure hope that in the end this works out in your favor. To conclude I’d like to encourage other readers who are considering buying life insurance with the following story.
I had a client a few years ago apply for life insurance, and during the application process told me she did not want to disclose a particular lifestyle choice. I counseled disclosure explaining the contestability period and that her application would be shopped until adequate coverage for an acceptable premium was found. Not all carriers look at all issues of health or lifestyle in the same way. Part of an agent’s task is to advocate for the client and find the best fit for both the client and the insurance company.
She took my advice, answered all of the questions truthfully and accurately, and bought the coverage offered. The insurance company issued the policy as applied for. However, within the two-year contestability period she passed away. The insurance company “contested” the claim and sure took their time looking into the coroner’s report, medical records, blood tests, media etc.…and paid the policy in full.
The point: it’s very important to disclose everything in an insurance application to avoid claim denial.
Many people want to avoid certain questions on the application to save money on premiums and keep it out of their records. For example, tobacco and recreational drug use are often not admitted. However, this creates a potential claim risk and unintended consequences to surviving family members.
If an insured passes away during the first two years of a life insurance policy's existence, the insurance company generally has a right to contest a claim. What the insurance company is doing is investigating the information provided on your Uncle's initial application to see if there was a “material misrepresentation." If the insurance company finds that there was a material misrepresentation, e.g. he claimed to be a nonsmoker but had smoked for the last 20 years, then the insurance company may have the right to deny the claim. If after its investigation, the insurance company finds that there was no material misrepresentation your claim should be honored. An insurance company is generally required to honor a policy, pay the death benefit, even if the insured only made one premium payment.
Be sure to provide all medical records and documents requested by the insurance company during the investigation period. If you feel that the insurance company has wrongfully denied your claim you may want to contact an attorney to explore possible next steps.
An insurance company reserves the right, in most cases, to review all claims made in the first two years with more requirements than they would after two years. This is to prevent fraud and other factors that might have influenced the insured to take out coverage. Extra "evidence" could be required if the insured passes away during the first two years, and if provided, most times the claim is paid. However, as you might expect, a passing during the first two years is very rare as medical exams were passed, questionnaires were reviewed, and medical records were examined many times. If all those "hoops" were passed successfully, and then there is a death, one can understand how an insurance company has to rely upon a standard procedure for potentially fraudulent information. If no fraud is found, claims will be paid and the beneficiary needs to know how to proceed from there.
The other stipulation is a life insurance policy that clearly explained that a 2 year time frame must pass before the claim will be paid. These type of policies are usually guaranteed final expense policies (face amounts of $2K to $25K are common) and the insured did not have to pass a physical examination. If the insured passes during the "wait period," usually the death benefit is a return of the premiums paid plus a stated interest rate.
Jason R. Tate, ChFC, CLU, CASL
Jason Tate Financial Consulting
Company Website: jtfc.net
That's not necessarily true. Since you are in the two-year contestability period, the insurance company will most likely do a thorough investigation to determine all relevant information was given on the application. As long as everything checks out they should pay. The one exception could be if your uncle committed suicide then it is likely the claim will be denied.