When Does Life Insurance Not Pay Out? 7 Situations


Have you ever lost your wallet? If there were cash and credit cards inside of it, you probably had a sinking feeling in your stomach because you knew you’d have to cancel all of your cards and that you lost the hard-earned cash you’d been carrying around. Losing money never feels good; in fact, it feels terrible.

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Now, imagine how you’d feel if you were expecting a payment of $50,000 from a life insurance company because a family member had passed away, and you were notified that the life insurance company was refusing to pay you because of an error in the original application your relative submitted many years ago. 

Unfortunately, this second scenario happens more often than you’d think. Insurance companies get off the hook from paying millions of dollars in death benefits every year for many reasons.

In many cases, insured individuals paid thousands of dollars in life insurance premiums so that when they died, their survivors wouldn’t face financial hardship. But those survivors didn’t receive any money from the insurance company. How can this happen?

In this article, we’ll look at seven situations where life insurance doesn’t pay out and how you can ensure that this doesn’t happen to you.

Can Life Insurance Companies Refuse to Pay?

An insurance policy is the same as any other contract – both parties agree to fulfill specific responsibilities in order for something to happen. If either party doesn’t fulfill their end of the deal, then the agreement becomes null and void. In some cases, when this happens, one party must pay the other punitive financial damages.

In the case of an insurance policy, if the policyholder doesn’t fulfill their obligations or violates certain clauses within the contract, the life insurance company can legally refuse to pay the death benefit or face amount to the beneficiaries. 

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Situations Where Life Insurance May Not Pay Out

Nobody likes surprises when it comes to money owed them, particularly from insurance companies. Hardly anybody thinks they’re underpaying for insurance, and when it comes time for the insurance company to write them a check – they want it, and they want it quickly.

But there are situations where the life insurance company legally doesn’t have to pay a death claim. There are certain actions some people take that release the insurance company from any obligation to pay. Let’s look at seven of those.

1.   Suicide

A common situation in which a life insurance company doesn’t pay a death claim is in the case of suicide. Depending upon the state where you reside, your policy may contain a “suicide clause.” If it does have such a clause, and if you commit suicide within the specified time frame, your beneficiary won’t receive the death benefit. They’ll only receive back the premiums you paid to the insurance company. 

This suicide clause is also referred to as an “incontestability clause,” which is a window of time during which the insurer can investigate and deny any claims that are filed. In most states, the period is one to two years, and it begins as soon as the life insurance policy goes into effect.

Insurance companies developed this clause to protect themselves financially from people who took out large policies and then committed suicide so their families could realize a significant financial gain from their death. This seems unthinkable to most people, but before the suicide clause took effect, it happened more often than you might think.

2.   Misrepresentation

If you were less than honest answering questions on the life insurance application that asked about smoking, high blood pressure, or other health conditions, the incontestability period comes into play again. If the insurance company finds out during this one-to-two-year period, they have the legal right to cancel your policy.

If you’ve ever filled out a life insurance application before, you know that questions asking if you smoke or if you have ever smoked are pretty standard. Perhaps you quit smoking several years ago. The insurance company will still want to know this information because the effects of smoking are long-term.

Some insurance companies classify people as non-smokers if they haven’t smoked for a couple of years, while other companies might require that you’ve not smoked for five or ten years to be classified as a non-smoker.

Concerning something like high blood pressure, this is a perfect example of how important it is to be completely honest when filling out a life insurance application. For instance, if you don’t disclose that you have high blood pressure on your application and you then die during the contestability period – perhaps in an accident – your claim may not be paid. The insurance company could assert that your undisclosed high blood pressure could have been the cause of death and refuse to pay the claim.

There’s also a “material misrepresentation clause,” which is permanent, unlike the one-to-two-year contestability period, which is in force for a specific period of time. This clause is concerned with you intentionally withholding information from the insurance company to increase the chances that the insurance company will approve your application. Smoking, again, is a good example. Even if a claim has been filed, this clause still applies.

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3.   Dangerous activities

You’ve probably heard of professional athletes having a specific clause in their contract prohibiting them from participating in what are considered “dangerous activities.” The team they play for stipulates that the athlete can’t do something like ride a motorcycle or skydive.

A life insurance policy is much the same. When you think about it, life insurance is concerned primarily with risk management. If you’re a sky-diver, even with a parachute, you’re a higher-risk applicant than somebody who never gets into an airplane and would never consider jumping out of one. 

It’s best to be upfront about any dangerous activities you’re involved in and let the insurance company know when you fill out the application. You’ll still be able to do the activity, but you may need to pay extra to be protected or apply for life insurance with a company with no restriction on your particular activity.

4.   Illegal activities

Common sense dictates that if you die while you’re committing a crime or participating in illegal activity, the insurer can refuse to pay a benefit to your beneficiaries. For example, if you’re killed while robbing a bank, they won’t be paid.

That seems obvious, but here’s one that you might find surprising. What if you’re doing something illegal, and you don’t even know you’re doing it? Maybe you’re walking on private property and are legally trespassing, but you don’t know it (trespassing is a crime even if you don’t know you’re trespassing). Then, while trespassing, you’re chased by a vicious dog and die from a heart attack. If it does turn out that you were trespassing, the life insurance company could deny your claim.

5.   Act of war

There is an “Act of War” exclusion contained in some policies. It isn’t designed to exclude soldiers. It is in place to deny claims for civilians killed in a war or by an act of war, such as journalists and videographers whose jobs take them into the middle of battle regularly or travel to parts of the world where armed conflict occurs.

6.   Living outside of the United States

You may not have considered this one. Let’s say you’re living in the United States, and you take out a life insurance policy. You then move to another country. There might be a clause in your policy that excludes the payment of a death benefit if you aren’t living in the United States when you die. Be sure to check for any mention of this in your policy if you see yourself leaving the U.S. anytime soon.

7.   Fraud

Rest assured, the insurance company is going to look into the cause of your death. The company will look at the events leading to your death and compare them against your original policy application. If they find out you had certain health conditions or participated in dangerous activities when you applied for coverage and didn’t mention them, they can deny payment of the claim.

Tips for Ensuring Your Life Insurance Policy Will Pay Out When You Die

Believe it or not, reputable life insurance companies aren’t out to cheat your beneficiaries out of any money owed to them. But business is business, and a contract is a contract. They will not pay if they legally don’t have to. Period. 

You can take several steps to make sure that your beneficiaries get the money you intended for them to get when you took out your life insurance policy. 

The first thing you can do is always be truthful and complete with the information you provide to the insurance company on your application and what you tell the agent completing the application with you, if there is one. Insurance companies are not frugal when it comes to the cost of investigating the cause of death before they pay a claim, and they’re experts at doing it. You’re not going to outsmart a life insurance company at its own game, so save yourself the time.

Second, read your policy from cover to cover and keep it somewhere your beneficiaries know it is. Mistakes have been made by people who didn’t carefully read what they signed and agreed to accept. It takes time, but always read the fine print and don’t accept a policy if you’re pressured into quickly signing it. 

Some life insurance agents won’t tell you the whole truth about the policy they’re selling you and will try to rush you into buying it and accepting it. If you feel pressured, let it be a red flag that something isn’t right. You’re the customer – you control the pace of the transaction. Ask for another agent or choose another company if you’re uneasy.

Mistakes Kill Life Insurance Claims

It’s a very small percentage of people that intentionally defraud a life insurance company. Most unpaid claims happen because of an honest error or lack of common sense on the part of the claimant. If you tell the truth, read your policy, and pay your premiums on time, you’ll never have to worry about your loved ones not getting the money you intended for them. 


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