A life insurance policy claim should be a fairly simple and straightforward process which ends in the beneficiary receiving the agreed upon payment in a timely fashion. Unfortunately, insurance companies do not always honor their agreements. The insurance company may try to deny your claim or to pay you far less than you are entitled to. If the insurance company’s behavior constitutes bad faith, you may even be entitled to further compensation for your trouble.
Reasons for Denying Life Insurance Claims
Insurance companies use many excuses for denying life insurance policy claims. Some are valid, some are not, and some fall into more of a gray area. Examples of reasons that insurance companies deny payment of life insurance benefits include:
- Unpaid premiums
- Cause of death is excluded by the policy contract
- Pre-existing medical condition
- Material misrepresentation – failure to disclose certain types of information during the application process
- Improperly filed claim
Material Misrepresentation and Incontestability
One of the most common reasons that insurance companies give for denying life insurance claims is material misrepresentation. Insurance companies ask many questions on their applications and use the answers to assess risk. They determine whether to issue coverage and how much to charge in premiums based on this risk assessment.
Material misrepresentation includes failure to disclose existing medical conditions and other risk factors such as smoking and other lifestyle choices and activities, about which the applicant was asked during the application process. Insurance companies are allowed to deny claims based on material representation, but there is a limit.
Unless they can prove intentional fraud, in most cases material misrepresentation falls under incontestability after the insurance policy has been in effect for at least two years.
Cause of Death
Cause of death is not always as straightforward as you might believe when it comes to life insurance. Some policies have exclusion clauses which protect the company from having to pay out for certain causes of death. Suicide is a commonly excluded cause of death, although it is not excluded in all policies. Some policies only cover accidental death, while others only cover death due to “natural causes”.
Insurance companies will sometimes try to get out of paying a legitimate claim by disputing the cause of death. For instance, it may try to call a drug overdose or a car accident a suicide if suicide was excluded in the policy.