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Four reasons your life insurance claim may be denied

In preparation for your death and the toll it will take on your family or other beneficiaries, it is common to seek life insurance coverage, either personally or through an employer. However, it is not unusual for many insurers to dispute claims for several reasons, and some companies actively seek out those reasons to avoid paying the benefit.

An article by the Los Angeles Times describes how the sudden and unexpected discovery that there is no life insurance coverage often compounds the tragedy of losing a loved one and causes financial hardship for those left behind.

To help guard against the risk of your loved ones being left with too little to live on, let's consider a few of the reasons why life insurance companies routinely deny claims.

1. The Contestability Period

Your life insurance policy is a contract and may contain premium requirements, waiting periods and exclusions.

In most states, insurance policies include a two-year contestability clause. If you pass away within two years of your policy's effective date, the insurer can investigate whether the information on your application was correct and then try to rescind the policy or contest coverage based on your failure to disclose information they deem important in assessing risk.

This is a practice known as "postclaim underwriting," according to an article in the American Association of Justice's law newsletter.

2. Misrepresentations On Applications

Omitting or lying about information regarding medical history, income or other items on an application is called a material misrepresentation.

This is supposed to be a way for companies to protect themselves against insurance fraud, or policies being purchased for the purpose of a beneficiary murdering the policyholder and collecting the benefit. It is the primary reason insurers provide for rescinding policies or disputing claims during the contestability period.

Even if the misrepresentation is unrelated to the cause of your death, the insurer can still refuse to pay the death benefit.

Minor omissions, such as a visit to the doctor, or errors, like writing an incorrect driver's license number or street address, may not lead to denial. However, some misrepresentations may be used as grounds for denial even after the contestability period is over. For example, if you intentionally hide the fact that you have a serious medical condition, the insurance company may have grounds for denying a death benefit claim.

3. Policy Exclusions

Many life insurance policies also include exclusions for death by suicide, for tobacco use and for other issues. However, those exclusions potentially can be waived if your death takes place after the contestability period.

4. Unpaid Premiums

Another reason for an insurer to deny a life insurance claim could be your failure to keep up with policy premiums according to the terms of your policy. Policies can lapse if premium payments aren't made on time or within the grace period allowed by your insurer.

While certain policies with a cash value sometimes include a provision for the carrier to borrow from the policy value to pay overdue premiums, the policy only is protected as long as a sufficient cash value remains.

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