How does the life insurance claims process work?

Industry surveys contend that life insurance claims are denied less than 5% of the time, while others more skeptical of the life insurance industry believe the denial rate is several times higher than that. An issue that is not up for debate is that life insurance claims all arise from tragic and stressful situations, which necessarily leave claimants vulnerable and essentially at the mercy of large, profit-driven life insurance companies.

There are many types of life insurance products, but all of them boil down to “term” or “permanent” life insurance. Simply stated, a term life insurance policy covers a set amount of time – for example, a 20-year policy should pay a death benefit if the insured passes away during that 20 years. After the 20-year term passes (and there is no renewal), the policy ends. As a rough comparison, a term policy is like leasing a car – after three years, the car is turned in and the owner and dealer go their separate ways.

A permanent life insurance policy can take various forms (such as “whole” or “universal”), but rather than have a set coverage term these policies have a cash value that can build up over time and sustain the policy until the insured eventually passes away. As a rough comparison, a permanent policy is like buying a car – the owner makes payments and builds up equity in the car, which the owner can sell or just keep driving.

To collect on either a term or permanent life insurance policy, a claim must be filed. This will involve providing a death certificate, along with a completed claim form provided by the life insurance company. Claims are usually processed and then paid out, generally within a few months at most. But that is not always the case – sometimes the life insurance company denies the claim.

Why would a life insurance company deny my claim?

Life insurance companies are in the business of making money, so they will choose not to pay out on claims whenever possible. Remember that life insurance policies are written by life insurance companies and can be difficult to interpret – not surprisingly, the devil is always (purposefully) in the details. For example, a life insurance policy is a contract just like a contract to buy or sell a home or business, but unlike most other types of contracts, you may have noticed that you are not allowed to change any of the wording of a life insurance policy.

There are thus several built-in grounds for denying life insurance claims, which typically fall into a few main categories:

Premium Payment

This seems simple – if the policy premiums are not paid, the life insurance policy gets canceled, and any claim for death benefits is denied. But whether a term or permanent policy, there can be different kinds of mix-ups and misunderstandings. That is why an insurance company is required to give sufficient notice before a life insurance policy is canceled (which is not always the case). In addition, many permanent insurance policies have very complex formulas that rely on the calculation of flexible premiums, loans, cash buildup, and sometimes even stock market indexes (leading to life insurance companies making miscalculations on their own policies).

Exclusions

Life Insurance companies put various exclusions in their policies to deny coverage. Some of these exclusions may be out of the insured’s control, like being killed in a war. Other exclusions include voluntarily dangerous or illegal activities, so if the insured passed away base jumping or robbing a bank at gunpoint, you can expect that there will be some issues with any claims. That said, the life insurance company, on its own, will try to make the determination of whether there was something that could fit into its definition of an exclusion – and, again, the insurance company’s policy language deliberately builds in plenty of wiggle room.

Life Insurance Application

Life insurance companies will comb through a policy application to find anything that was not totally accurate or not mentioned at all. For example, if it turns out that, contrary to what was listed on the application, the insured was a heavy smoker, had a severe heart condition, or was a professional daredevil, you can expect that there will be some issues with any claims. Here too, there can be self-serving gray areas of what the insurance company chooses to consider a misrepresentation or omission, and whether either is material.

Contestable Period

There is usually an initial time period where the life insurance company does not have to pay any claim, or where (like a probationary period for a job) the life insurance company is given a very wide latitude to use the above grounds along with whole host of different excuses not to honor a claim. For example, if an insured were determined to have passed away by suicide within 2 years of the start of the policy, most life insurance companies would deny that claim. As always, since the life insurance company believes that it holds all of the cards during the contestable period, any ambiguous circumstances or policy language can, and will, be used to deny a claim.

What do I do if my life insurance claim is denied? Do I Need A Denied Life Insurance Claim Lawyer

Having a life insurance claim denied can be daunting, especially considering the traumatic and likely hectic situation that caused you to file the claim. There is also a large insurance company on the other side whose reasons for denial usually boil down to some form of “because we said so.” Try not to feel overwhelmed, there is help available. The life insurance company has acted in its best interests, now you have to make the choices that are best for you. Do your research and consult an experienced law firm to be on your side and guide you through this process. Most importantly, do not delay, as all claims have applicable limitations periods.