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You're insured, you die, your policy pays, right? Not so fast

Life insurance can be a relatively low-cost way to leave a tidy sum to a loved one. If the insured's estate plan is done right, the full payout will go directly to the beneficiary, tax-free -- in Minnesota, at least. What could be easier, really? The beneficiary does not have to wait for the estate to go through probate, so the payout should come fairly quickly. All the beneficiary (or the estate) has to do is file the claim.

Unfortunately, few things in the insurance world are as easy as they look, or as easy as they should be. Yes, a life insurance policy is payable upon the death of the insured, but, depending on the policy, the insurance company may want more information than a death certificate before it will write the check.

An insurance policy is a contract between the insurance company and the policyholder, so when the courts get involved, they tend to rely on the principles of contract law to resolve the dispute. For example, the insurance policy states that failure to pay the premium for two consecutive months will result in cancellation of the policy. If the policyholder does not pay for two months and has no good reason, the court will likely go to the policy to see if either the insurer or the policyholder breached the contract agreement.

(The tricky thing about life insurance is that the policyholder may not be the insured. That, however, is a topic for a future post.)

So, if the insured has passed away, how can the life insurance company deny the claim? Nonpayment is one reason -- perhaps the most obvious one. Each policy includes a nonpayment provision stating that the insurance company has no obligation to pay the benefit if the insurance company has not been paid.

Fraud is another obvious reason for denial. If the policyholder or the insured knowingly provided false or misleading information on the application, the insurance company will not pay. The misrepresentation must be about something important to the insurance company, something that would have made a difference to the decision to write the policy. Smoking is a good example for life insurance: Had the company known that the insured was a smoker, it would have denied coverage or offered different policy terms.

Other reasons are not quite as straightforward. In fact, under certain circumstances, denials for nonpayment and fraud are not all that straightforward, either. We'll explain more in our next post.

Source: InsuranceQuotes.com, "4 most common reasons why insurers deny life insurance claims," Emmet Pierce, June 1, 2015

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