You have life insurance to protect your family when you’re gone, but unfortunately, situations arise in which life insurance won’t pay out. Understanding these reasons is crucial to avoid making a mistake that could rob your family of financial security.
Insurance companies run under government regulation and monitoring. They hold large capital reserves to cover the policies they provide, which means they always have enough to protect your policy if the unexpected happens to them, such as going bankrupt.
It’s worth noting that the likelihood that life insurance won’t pay out is rare, especially if you’re honest on your application and pay your premiums.
This guide will look at the reasons life insurance won’t pay out. Armed with this information, you’ll know what to do and what not to do when looking for life insurance.
1. Dying Right After Getting Life Insurance
A life insurance two-year clause is one of the reasons life insurance may not pay out. Under this clause, the insurance company has a right not to pay your beneficiaries if you lose your life within the first two years of your policy.
The clause protects insurers from fraud by allowing them to reopen your entire application and review it for any mistakes made during the underwriting period. The company may contest the claim if you lied on your application to get coverage you didn’t qualify for. The act is known as material misrepresentation.
Most life insurance policies also won’t pay out if you take your own life within 12–24 months of taking out the plan. Insurance companies want to discourage people from taking out high-value policies only for them to take their lives to get their families out of debt.
The insurer will pay out after the first year is out in some cases; however, they will reject the claim if there are details about your mental health you didn’t disclose initially.
2. If You Die From Risky Activities or Behavior
Engaging in high-risk activities like skydiving may put you at risk of not getting a payout if you die during the activity. Insurance companies know such activities put you–and them–at a higher risk.
You should disclose this information when applying for life insurance. The company will classify you as a high-risk individual for life insurance, so if you fail to provide this information upfront, your beneficiaries won’t get a payout if the company realizes that you died because of the activity.
3. You Die Due to Criminal Activities
Your insurance company can deny your life insurance claim if you die while committing a crime or participating in illegal activities. The same happens if you die while committing a crime unknowingly, such as trespassing on private property.
4. You Lied on Your Application for a Life Insurance Policy
Not being truthful in your life insurance application is another reason life insurance won’t pay out. Indeed, the company may cancel your policy or raise your premiums. They may not pay the benefit if they find you falsified the details.
This may also happen if you withhold critical information, which in some cases may be deemed fraudulent. If you claim not to be a smoker but your medical exam reveals you are, for example, that is a misrepresentation. You put yourself at financial risk if the insurance company finds it approved your application because you lied about your smoking status.
5. Your Policy Lapses Because You Missed Payments
It helps to remit your premiums when they’re due to maintain the validity of your life insurance. Missing payments makes the policy lapse, meaning that the agreement ceases to be valid. The insurer can deny your death benefit if something happens to you but you have outstanding premiums.
6. Your Death Is Because of an Act of War
It’s important to check if your life insurance policy document has an Act of War clause before you sign. The insurer will likely not pay your claim if you die because of war activities if there is an Act of War clause. Journalists who travel to a conflict location, for instance, won’t get a payout if they lose their lives in the conflict.
7. You Move Outside the Country
A life insurance policy purchased in the United States only remains valid if you continue living in the country. The insurance company may not honor your claim if you die while living outside the country.
8. You Outlive Your Policy
You or your beneficiaries won’t have anything to claim if you outlive your fixed-term life insurance policy. Your insurance company won’t pay out if you don’t pass within the fixed number of years of your policy.
Do Life Insurance Companies Really Pay Out?
Many preconceived notions surround life insurance. Some people think it’s a waste of money, and others believe getting a payout after the policyholder dies is a hassle.
The truth is that life insurance that pays out immediately does exist, which explains why many Americans believe in life insurance. Statistics show that life insurance coverage in America reached $19.6 trillion by the end of 2018. Insurance companies paid out more than $290 billion in benefits.
Avoid Life Insurance Mistakes That Could Put You at Financial Risk
Be sure to familiarize yourself with the reasons life insurance won’t pay out before buying a policy so you can avoid putting your money where it won’t give any yields. An insurance professional can guide you on this process and more.
Bogart Wealth can help evaluate your risk factors before you sign a life insurance policy. We can also guide you in choosing from among different life insurance providers. Contact Bogart Wealth to speak with an expert about your life insurance payout concerns.
