Understanding Common Reasons for Life Insurance Claims Denial: What You Need to Know
Life insurance is a crucial financial safety net for many families. However, situations may occur where life insurance claims are denied, causing distress and financial strain to beneficiaries during an already trying time.
Understanding the reasons claims get denied can help policyholders avoid pitfalls from the start, ensuring their beneficiaries receive the benefits as intended. Read on as we discuss some common reasons why life insurance claims get denied and what policyholders or beneficiaries can do if they suspect wrongful denial or bad-faith insurance practices.
Common Reasons for Life Insurance Claims Denial
Misrepresentation on the Application
One of the most common reasons for life insurance claim denial is misrepresentation on the application form. This can include providing incorrect information about age, income, health history, smoking habits, or high-risk activities. If an insurance company discovers a policyholder misrepresented or omitted information, it may deny a claim, even if the misrepresentation was unintentional.
For both term and whole life insurance, honesty is the best policy. Ensuring that all information provided during the application process is accurate and complete can help avoid claim denial. If a minor mistake was made that isn’t material, the insurer might be wrongfully denying the claim.
Another common reason for life insurance claim denial is if the policyholder dies within the policy’s contestability period, typically two years from the policy’s start date. During this period, the insurance company has the right to investigate and deny claims if it finds any misrepresentation in the application. Contestability periods can vary from policy to policy but ultimately are governed by state law.
Life insurance policies can lapse if the policyholder stops paying the premiums. If the policy lapses and the policyholder dies, the insurance company may deny the claim. It’s vital for policyholders to keep their policies in force by paying premiums on time. Automatic payment setups can help avoid unintended lapses.
In the case of whole-life policies, if the cash value is depleted (due to policy loans, for example), and no more premiums are paid, the policy can lapse, leading to a denied claim.
Some states, such as California, place strict requirements on insurance companies regarding when they can terminate a policy for nonpayment, including timelines for providing notice to policyholders or other designated persons and a grace period to get a lapsed policy current. In the case of California, insurance companies from out of state often misapply the law and don’t follow the proper procedures, leading to claims being unlawfully denied.
Exclusions in the Policy
Many life insurance policies have specific exclusions, such as death from suicide within the first two years of the policy or death resulting from risky activities not disclosed during the application process. If the cause of death falls under one of these exclusions, the claim may be denied.
Bad Faith Insurance Practices
Sometimes, an insurance company may deny a claim without a legitimate reason, a practice known as bad faith. Examples include unreasonable delays in processing a claim, denying a claim without proper investigation, or interpreting policy language in an unreasonable way to avoid paying a claim. In a bad faith lawsuit, damages can go beyond forcing the insurer to pay policy benefits and include other damage the wrongful denial caused, including emotional suffering and punitive damages where appropriate.
What to Do if Your Claim Is Denied
If you feel a life insurance claim was wrongfully denied, follow these steps:
Understand the Denial: First, understand the reasons for the denial. The insurance company should provide a written explanation.
Review the Policy: Carefully review the insurance policy terms and conditions to see if the proffered reason for denial aligns with the policy.
Collect Supporting Documents: Gather all necessary documents that support your claim, including the death certificate, medical reports, and policy-related documents.
File an Appeal: If you believe the denial was unfair, you can file an appeal with the insurance company. This usually involves writing a letter and providing supporting documentation.
Legal Assistance: If your appeal is denied, consider seeking legal advice. A lawyer specializing in insurance claims can help you understand your options and potentially file a lawsuit.
Remember, every insurance policy is a legally binding contract. Insurance companies are obliged to act in good faith and fulfill their contractual obligations. Understanding these common reasons for claim denials can help you as a policyholder or life insurance beneficiary, ensuring the policy will be honored when it comes time to make a claim.