When you buy life insurance, you do so with the expectation that your policy will pay out a death benefit if you pass away while you're covered. Unfortunately, there are certain circumstances where life insurance won't pay out the promised benefit.
This could occur if you die during something called the contestability period and your insurer discovers that you left information off your application. It could also occur if you die from a cause that isn't covered — such as if you die by suicide shortly after buying your policy and life insurance suicide clauses prevent your insurer from paying the death benefit.
It's important to understand the circumstances where your loved ones won't get the financial protection life insurance is supposed to provide so you and your family won't be caught off guard.
What is a life insurance contestability period?
A life insurance contestability period is a period of time after you purchase a life insurance policy when the insurance company can conduct a careful review of your application if a claim is made.
Typically, the contestability period lasts for one to two years. If you die within a year or two after buying coverage, the insurer is allowed by law to carefully scrutinize your application and conduct an investigation.
If the insurer finds out that you withheld information about your health or were dishonest in any way, the insurer doesn't have to pay a claim made by your life insurance beneficiary.
This is true regardless of your intentions, so even if you didn't mean to omit information, the insurer still won't have to pay the promised death benefit. And it's also true even if the missing or inaccurate information didn't relate to your cause of death. So, for example, if you lied about a recent cancer diagnosis but you died after being hit by a car, your insurer could deny a claim for your death benefit even though your undisclosed cancer diagnosis had nothing to do with the reason you died.
Why do life insurance contestability periods exist?
Life insurance contestability periods exist to protect insurers.
Insurers use the information on your application to assess how risky it is to provide you with coverage. They ask you relevant life insurance questions, such as whether you have a history of illness or if you smoke. Based on the answers that you provide, they determine whether to issue a policy and how much to charge for it.
If you didn't give your insurance company the information they needed to accurately assess your health status, then they couldn't make an informed choice about whether to cover you or how much to charge you. The insurer could end up losing a lot of money because sick people might sign up for coverage and then immediately make a claim.
Say, for example, you were diagnosed with a serious heart condition likely to be fatal within a year — and you purchased a term life insurance policy the day after your diagnosis without disclosing your bad medical news. The chances you could die quickly are extremely high in this case. But the life insurer wouldn't know it if you didn't disclose your condition. You'd likely pay premiums for a short time and the insurer would be forced to pay out a large death benefit. That's not how life insurance works, because insurers wouldn't be able to afford to continue issuing policies if many people did that.
What happens if you file a claim during the contestability period?
If a life insurance beneficiary files a claim during the contestability period, the insurer can — but doesn't necessarily have to — investigate the information provided on the application.
If the insurer identifies a minor error, they might pay out part of the death benefit, though the amount may be lower than the original policy. The reduced amount will likely reflect the extra money you should have paid in premiums if the mistake had not been made. But if major errors or omissions are discovered, they could deny your claim. That means your beneficiaries might not get the death benefit your policy offers.
In most cases, if the person who bought the policy was honest and forthcoming on the application, then there will be no problem. The insurance policy will pay out as promised even if the policyholder dies shortly after getting coverage. With the best life insurance companies, this investigation and payout process happens quickly so beneficiaries aren't left waiting for the money they may need to cover expenses after a death.
4 times life insurance won't pay out
The contestability period isn't the only factor that can affect whether your insurance provides the promised benefits. There are other circumstances where a life insurance policy may not pay out.
1. The manner of death isn’t covered by the policy
Life insurance policies generally cover most causes of death. However, there may be some exclusions.
For example, life insurance suicide clauses are found in some policies. These generally restrict coverage for a death by suicide that happens within a specific timeframe after the policy was first purchased. A suicide exclusion might prevent the policy from paying out if you take your own life within the first two years of the policy, depending on the policy and insurer. However, if you die due to suicide after the two-year period specified in the suicide clause has ended, then your beneficiaries might still receive the promised life insurance benefit.
If you are considering suicide, you need to know there is help available. The National Suicide Prevention Lifeline is available 24/7 to provide free, confidential support. You can call or use online chat to speak with someone, and services are available in Spanish as well as in English.
Policies may also exclude a death that occurs when involved in certain high-risk hobbies, such as flying a non-commercial aircraft.
2. No life insurance beneficiary was designated
If you purchase a life insurance policy but you do not designate a beneficiary to receive the death benefit, the insurer will typically pay your claim out to your estate. Your estate includes your possessions, such as your home, vehicles, and personal property.
If you have a will, it might specify who inherits your estate — which can include the life insurance proceeds. If you have no will, probate laws specify which relatives should inherit. In circumstances where you have no heirs because you have no surviving family members at all, then the state gets to keep the assets in your estate — which could include your life insurance policy.
Your insurer will still pay out to your estate in most cases. However, if you bought a policy to protect a loved one, the person who you intended to receive the money might not get it unless you designated them as a beneficiary when you bought coverage.
3. Policy premiums weren't paid
If you do not pay policy premiums, your coverage could lapse. If your insurance is not in effect at the time of your death because you stopped paying premiums, then your insurer will probably not pay out the death benefit.
Policies generally do not lapse until after a grace period, which could be between 30 and 90 days depending on your insurer.
4. The insurance application contained falsehoods
If you die during your contestability period, then the insurance agent may discover your falsehoods. If the insurer discovers that dishonest information was provided on a life insurance application, the company could decline to pay out the death benefit. For example, if you claimed you never smoked but subsequently passed away from lung cancer and the insurer discovered you smoked a pack of cigarettes a day, then they might deny your beneficiary's claim.
How long is a life insurance contestability period?
Typically, a life insurance contestability period lasts for between one and two years after you first purchase a life insurance policy. If you die during that time period and your beneficiaries make a claim for the death benefit, the insurer can — and often will — conduct an investigation to see if the application contained any inaccuracies or if any important information was omitted.
If the insurer discovers the application didn't contain all of the required information or that any of it was inaccurate, then the death benefit might not be paid out or the beneficiaries could potentially receive a reduced benefit.
Can a life insurance claim be denied?
A life insurance claim can be denied:
- If your manner of death was not covered by the policy. For example, many policies exclude death when on a non-commercial plane or death by suicide if it occurs within a year or two of buying insurance coverage.
- If you were dishonest on your application or made omissions about your health history and you die during the contestability period, which is usually one to two years after you bought coverage.
- If you allowed your coverage to lapse by not paying premiums, you passed the grace period for late payments, and your policy was suspended or canceled.
What isn't covered by life insurance?
Life insurance provides coverage for most causes of death if you pass away while your policy is in effect. However, certain causes of death may be excluded.
For example, many policies contain life insurance suicide clauses. These prevent the insurer from paying a death benefit if you die by suicide within a year or two of purchasing coverage. It's also common for insurers to exclude deaths that occur when you are engaged in dangerous activities, such as flying in non-commercial planes.
What's an incontestability clause?
An incontestability clause prohibits an insurer from refusing to pay a claim on the grounds of misrepresentation in the application. Typically, the clause will specify that an insurer can no longer declare a policy void due to inaccurate or incomplete application once the policy has been in effect for several years.
The bottom line
When you buy life insurance, you do so to get the peace of mind of knowing that it might help protect your loved ones financially after you're gone.
By developing an understanding of the situations that could invalidate your coverage, you can do your best to ensure your policy actually pays out as promised. It's worth learning the rules to make sure you don't leave your loved ones unprotected in case of tragedy.