What are the reasons a life insurance policy won't pay out?

What disqualifies life insurance payout?

There are a number of reasons why your beneficiaries might face a denial when filing a claim on your life insurance policy. Here are some of the most common ones.

1. The insured lied on the life insurance application

It’s vital to be honest on your life insurance application. While it may be tempting to say you don't smoke or that you have no medical conditions, lying on your life insurance application could void it.

There's typically a two-year contestability period after a policy has been issued. If your insurer finds out during that time that you've lied, it may cancel your policy or increase your premiums.

If the lie is particularly egregious, the insurer could deem it fraud, even after the two-year contestability period is up. In turn, the policy could be rescinded and a claim denied. For instance, if you die from a smoking-related illness but had claimed to be a non-smoker on your application, the life insurance company may refuse to pay the claim.

2. The policy lapsed for non-payment

Life insurance companies have grace periods and may even reinstate your policy after it has lapsed if you make the payment. However, if the policy has lapsed due to non-payment when the insured dies, the insurance company won’t pay the claim.

Make sure that you check on your policy regularly. Set up automatic payments to avoid a lapse and ensure the payment method is up to date. Remember that although a permanent life insurance policy may be able to draw on cash value to pay the premiums, that money will run out after a while.

3. The beneficiaries don’t know about the policy

If you never tell your beneficiaries about your life insurance policy, it doesn't mean the insurer won't pay them after your death. However, it does make for a more difficult process.

While most life insurance companies conduct database checks for the death of policyholders so beneficiaries will get paid, not all insurers do so in a timely manner. That's why it's important that your loved ones know about your policy and where to find policy documents after you're gone. 

If they don’t know about the policy, they won’t file a claim and the funds could go uncollected.

4. The beneficiary died before the insured, and there was no secondary beneficiary

It's important to name a secondary beneficiary, sometimes called a contingent beneficiary. If your primary beneficiary dies before you and you haven’t updated the policy, the claim will be paid to your second beneficiary. You can even name a third (final) beneficiary.

If you don't have anyone waiting in the wings, it doesn't mean the money disappears. In that case, the proceeds will go to your estate. However, if the estate is subject to probate, your survivors may have to wait a long time to get the death benefit.

5. The cause of death was excluded by the policy

Life insurance policies typically have a two-year exclusionary period for suicide, so your beneficiary typically would receive whatever you paid in premiums, but not the policy's face value. So-called "suicide clauses" vary by insurer and are designed to discourage people from buying life insurance when contemplating suicide.

Another caveat: If you're killed while committing a crime, the claim might be denied.

And last, if you don't disclose to your insurer when you apply for a policy that you have a high-risk hobby, such as sky-diving or auto racing, and you die while doing it, your insurer may decline the claim.

6. The beneficiary wasn't updated after a divorce

In some states, the law requires that life insurance companies automatically drop an ex-spouse as a beneficiary from life insurance after a divorce. That means you have to rename the beneficiary.

Let's say your spouse is the beneficiary on your life insurance policy. After you divorce, if you want to keep your ex as beneficiary, you’ll have to add them back to the policy. If you don’t want to keep them as beneficiary, you’ll need to name someone else.

However, if the divorce decree requires one spouse to maintain a life insurance policy (this is fairly common) and the ex-spouse is the beneficiary, the divorce will not change the life insurance beneficiary designation.

However, if your life insurance is through your employer, it’s likely that your life insurance falls under federal retirement income protection laws that would supersede state laws. In that case, your ex-spouse won’t need to be renamed.

What to do if life insurance claims are denied?

If you feel the insurance company doesn't have a reasonable cause to deny your life insurance claim, here’s what to do: 

• Contact the insurer. If you're unclear about the reasons for the claim denial or there's a lack of proof and documentation, contact the insurance company and ask for specifics.
• Contest the rejection. If you have adequate proof and a sound reason to contest the claim denial, you can appeal the insurance company’s decision in writing. You'll want to include specific details, such as the date of the initial claim, your policy number, and why you believe the claim was wrongly rejected. Be sure to include any relevant documentation, such as a death certificate. 
• Contact a lawyer. Reach out to an attorney who specializes in insurance law/settlements/appeals.

How often do life insurance companies deny claims?

According to 2019 American Council of Life Insurers (ACLI) data – the most recent available – about 3% of claims were disputed. By the end of the year, only 1.7% of the claims that had been contested remained unpaid.