Life insurance is designed to provide financial security to beneficiaries by paying out an agreed-upon sum of money when an insured individual dies. However, life insurance benefits are not foolproof, some loopholes can lead to a denied life insurance claim. In fact, in 2020, $372 million in new claims were delayed or denied for a variety of reasons.
Learn more about some common reasons for life insurance claim denials, tips to avoid having your life insurance claim denied, and your options for dealing with a denial.
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Common Reasons For a Denied Life Insurance Claim
There are a variety of life insurance claim denial reasons, ranging from simple errors to material misrepresentation. Here’s a look at some of the issues that may cause your claim to be denied.
The policyholder died during the contestability period
Life insurance policies typically have a two-year contestability period when coverage begins. If the insured dies during this time, the company has the right to contest the payout. This does not necessarily lead to a denial, but it does give the insurance company the right to investigate the deceased’s background information and medical records. If the investigation uncovers something that was not disclosed in the application, the company may use this as a reason to deny paying the claim.
The policyholder died from an excluded cause
It’s common for life insurance policies to exclude coverage for deaths that occur under certain circumstances. Life insurance exclusions may include death by suicide, murder, and acts of war, as well as deaths caused by drug or alcohol abuse, participating in extreme or dangerous hobbies and activities, or engaging in illegal activities. If an insured individual dies from an excluded cause, the insurance company may deny premium payouts.
The policyholder misrepresented facts on the application
When the insured fails to disclose all material facts or is not fully truthful on their life insurance application, the insurance company may deny the claim based on material misrepresentation. This may include failure to disclose pre-existing chronic ailments such as high blood pressure or depression. Failure to mention smoking habits, a history of drug or alcohol abuse, or a dangerous hobby such as scuba or skydiving are also common misrepresentations.
Other types of material misrepresentation may include understating your age, neglecting to disclose another insurance policy, misstating your income, or misrepresenting your immigration status. In some cases, an agent’s mistake when completing an application can also lead to a misrepresentation.
The policy lapsed due to term limits and/or failure to pay premiums
Life insurance policies typically only remain active as long as the premiums are paid. If the policy lapses due to nonpayment of premiums, the life insurance company may deny the claim.
Since term life insurance policies cover the insured for a set period, this can also lead to a denial. If the term had already ended at the time of death, there is no more life insurance coverage, and the insurance company does not have an obligation to pay any death benefit claims.
The policyholder did not name you as a beneficiary
To receive a life insurance benefit, you need to be named as a beneficiary. If the policy owner changed their beneficiary to someone else, your claim is no longer valid. Also, if the policy owner did not name a beneficiary, the insurance carrier pays the death benefit to the deceased’s estate. In this case, the funds go through probate, where they may be used to pay bills and other costs before any remaining amount passes on to the policyholder’s living heirs-at-law.
There is a lack of documentation or proof
Before an insurer can pay out an insurance death benefit, they need proof that the insured party is deceased. At a minimum, this requires the submission of an original death certificate. The inability to provide this document may result in a denied life insurance claim.
You wait too long to make the life insurance claim
Generally, there is no time limit for filing a life insurance claim. However, state laws may vary, and some policies may include a filing deadline. In some cases, if you can show a reason you failed to file in a timely manner, you may receive an exception. You may also be able to appeal this type of denial and get it reversed.
You are not eligible to be a beneficiary
In some situations, a denial can occur because a named beneficiary is not eligible to receive a life insurance benefit. For example, the law prohibits paying out claims to minors, defined as those under the age of 18 or 21, depending on the state. In this case, the benefit is paid out to the estate instead or to the minor’s trust until they come of age.
The “slayer’s rule” also states that a life insurance benefit cannot be paid out to someone who murders an insured individual or is somehow tied to the murder. If this happens, the benefit pays out to the contingent beneficiary or the estate. Beneficiaries who are incarcerated also may not be eligible to collect a death benefit. In this case, the distribution of funds depends on state law and the nature of the crime.
What Causes Partial Life Insurance Payouts?
There are two situations where a life insurance company may pay out less than the full death benefit. The first occurs when the policy owner borrows against the policy while they are alive. If the loan was not paid off before the insured party’s death, the insurance company deducts the loan balance plus interest from the death benefit.
The second situation occurs if the policy owner had a living benefit on the policy. These sometimes allow the insured to take a portion of the death benefit early to help cover the costs associated with a chronic or terminal illness or a permanent disability. Once the insured taps into this benefit, the death benefit decreases.
Ways to Prevent Having Your Life Insurance Claim Denied
Dealing with a life insurance denial can be stressful, but there are a few things you can do to help ensure your claim will not be denied.
Ensure you know the policyholder’s life insurance details or where to find them
To file a life insurance claim, you typically need to have a copy of the insurance policy. At a minimum, the company needs basic information like the insured party’s name and the policy number. Having a copy of the policy can help you make sure the right people are paid out in the correct amounts. If you are a beneficiary of a life insurance policy, make sure you know where to find this information.
Make your life insurance claim in a timely manner
While there may not be a set time limit to submit your claim, doing it promptly can help ensure the process goes as smoothly as possible. You can typically initiate a claim by calling the insurance carrier at the number listed on the life insurance policy. After you provide the basic information, the insurer can give you instructions on how to move forward with filing your claim. This typically involves completing and submitting claims paperwork along with an original death certificate.
Be prepared with the proper documentation
Having the policy and all necessary documentation ready to go can speed up the claims process and help you avoid dealing with a denied life insurance claim. Make sure you have a copy of the policy so you can confirm the policy number and beneficiary information. If you need to appeal a denial, it’s helpful to have a copy of the original application.
To process a claim, insurance carriers typically require a completed claim form and an original death certificate. Some may also require you to submit the original life insurance policy if you have it.
Your Options If Your Life Insurance Claim is Denied
If you are denied a life insurance claim, it’s important to understand that you do not have to accept the denial right away. You may be able to take steps that could lead to a reversal and a payout. Here are a few options to consider.
Work with the insurer to clear up confusion
Sometimes, clearing up confusion can reverse a denial. For example, if the insurance carrier denies a claim due to receiving a photocopy of a death certificate instead of the original, submitting the proper documentation can remedy the situation. The carrier may also request documentation such as a copy of the insured medical records, insurance payment receipts, or the autopsy report.
Start by reading the denial letter carefully to determine the reason for the denial, then reach out to the insurance company to find out whether you can take steps to resolve the issue. If you are informed of your denial over the phone, you have the right to request a written denial letter. This letter provides you with important information such as the date the decision was made and the reason for the denial. The letter may also explain the company’s appeals process.
Formally contest the denial
If you’re not able to resolve the issue by clearing up confusion, the next step is to formally contest the denial. This is done by presenting your argument for why the claim is legitimate in writing and submitting it to the appeals committee along with any necessary documentation. Be sure to provide hard evidence rather than just your opinion.
The documents required may vary depending on the case you’re trying to make, but the more solid evidence you can provide, the more likely you are to win the appeal. If you do win, the carrier typically owes you the death benefit amount, plus interest.
If you do not get a satisfactory result and you believe your claim has been wrongfully denied, you can contact your state’s attorney general or department of insurance and ask them to investigate the issue.
Retain an attorney if necessary
Some cases may still be denied despite your best efforts. In this case, it may be beneficial to hire an attorney who specializes in life insurance claims. An attorney well versed in the legalities of claim disputes can also handle time-consuming tasks such as gathering and submitting required documentation. If you’ve hit a roadblock with your efforts or you want to turn the hassle over to a qualified party, hiring an attorney may be worthwhile.