What disqualifies a life insurance payout?
There are a number of reasons that may prevent a life insurance policy from paying out. It's important to understand how each policy works - get a free quote and speak with a qualified broker today.
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When considering life insurance, there are many factors to take into account. They include: finding the best policy for your family, not being over or under-insured, and confidently knowing your dependents will receive the benefit if you pass.
In 2021, over 29 million Canadians had a life insurance policy and insurers paid out over $119 billion in benefits (Canadian Life and Health Insurance Facts, 2022 Edition). But what about the policies that didn’t pay out? Why were these benefits denied?
Four common reasons for why life insurance claims are denied
While there are many potential reasons why a life insurance claim may not pay out, let’s take a look at the top four most common ones.
The death occurred during the contestability period
When you buy a life insurance policy, there is what’s called the contestability period. Your provider reviews your application to determine if there are any false claims, omissions, and your general health status.
Typically, this period is between one and three years of a new policy. It allows the insurance company to avoid paying out any fraudulent claims. If you pass away during this period, it does not mean that the life insurance company can deny payment of the benefit. The insurance company must still honour the contract, but if they find any false claims on the application, they reserve the right to deny payment.
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The type of death wasn’t covered by the policy
Most life insurance policies don’t cover all forms of death. These policy exclusions eliminate coverage for deaths that providers deem too risky. For instance, death by suicide and those that result from intoxication, and acts of war. An act of war exclusion can apply to military personnel who might die in active duty, but it can also apply to individuals who regularly visit places where there is active armed conflict.
They also look at risky behaviours, such as any activities that could result in “self-inflicted” injury (e.g. skydiving).
Pre-existing conditions are a common exclusion from life insurance policies. If it were discovered that you had an ailment before you applied for a policy, and you died as a result of it, the insurance company wouldn’t pay out the death benefit since the passing was predictable and deemed uninsurable.
So, always review the fine print of your life insurance policy before agreeing to its terms. Otherwise, your beneficiaries will be in a bind upon your death.
TAKE NOTE: Some life insurance policies have geographic restrictions. So, if you’re travelling to a high-risk area (e.g., a region involved in an armed conflict), your provider may not pay your death benefit. Speak to your provider if you are planning to do so to ensure coverage.
Failing to disclose relevant personal information on your application
Misinformation on a life insurance application is grounds for claim denial. Intentional misinformation can have serious repercussions. If you fail to disclose any relevant medical history such as being a smoker and/or use drugs/alcohol, or omitting or downplaying risky behaviour, you could be found guilty of insurance fraud.
Sometimes misrepresentations can be unintentional. For example, if you don’t disclose a minor ailment or a regular medical check-up on the application, this unintentional non-disclosure doesn’t automatically lead to a denial. The insurance company would need to show it wouldn’t have issued coverage had it known the non-disclosed fact. It’s rare people applying for life insurance are in perfect health and haven’t had regular medical check-ups.
Even if you think it’s a white lie, honesty is always the best (insurance) policy. You may think that omitting facts will result in lower insurance premiums, but that’s false – and the cost of lying is far greater than what those higher premiums would be.
Not keeping up with paying your premiums
Money can get tight. Sometimes, it’s necessary to make hard decisions when budgeting. But if you miss paying a life insurance premium, there’s a chance of a policy cancellation.
Most insurance companies offer a grace period for late payments. However, if you find you’re unable to pay your insurance premiums on time, give your insurance provider a call right away. They may be able to defer your payments, or come to some arrangement that allows you to continue your policy.
You might need to change the coverage that you have, but in speaking to a representative, you may discover that you’re paying for insurance you no longer require, or that you could reduce your death benefit.
Some companies will be happy to reinstate your policy, while others might deny it outright. You may also be subject to a new contestability period, or have to undergo a physical to ensure your health condition hasn’t changed. Whatever the case, it’s best to keep up with your insurance premiums, and save yourself from any potential headaches.
Frequently asked questions about life insurance payouts
What percentage of life insurance policies pay out?
Insurance is a business, whose goal is to make money. Insurance companies bank on some policies not paying out. According to the Canadian Life and Health Insurance Association (CLHIA), in 2019, approximately 4% of life insurance policies did not pay out. With the growth of the life insurance industry in Canada post-pandemic, it is reasonable to expect that this figure has close to doubled. Life insurers are strict when it comes to payouts, so you need to be sure you understand the rules or risk the consequences.
What are other reasons life insurance policies don’t pay out?
If the beneficiary can’t be contacted, or the insurance investigation ascertains that the death was uninsurable. The CLHIA reports, in the majority of cases, the policies didn’t pay out because individuals chose not to renew.
While this can be the result of individuals comparing insurance rates and choosing to go with a different provider, it can also result from an individual failing to pay their premiums and letting their policy lapse.
If you’re older and unable to pay your policy, consider a viatical settlement before you stop paying. Might as well try to get some money for the premiums paid.
What is a lapsed life insurance policy?
A lapsed policy is what happens when an individual fails to pay their premiums, and their policy is rendered null and void.
Some people may fail to pay an insurance premium feeling they no longer require life insurance, while others may be unable to afford the premium. Call your provider to know your options before you stop paying.
Consider this: if you let your insurance policy lapse, all that money that you have been paying into the premiums over the years is gone, with no chance of being recovered. In fact, insurance companies expect a certain percentage of policies to lapse – the money they collect from said policies is re-invested or used to pay out other benefits.
What happens if your policy lapses?
When you consider that approximately 22 million Canadians have life insurance, a 4% rate of policy lapse is substantial. Call your provider to get your policy back in order, or to uncover your options. If the insurer determines your health condition has changed for the worse, or that you have reached an uninsurable age, they may prefer to issue a new, more expensive, policy altogether. To be clear, an insurer cannot change or cancel a policy once it’s in force, or change it in accordance with your health condition.
TIP: If you’re older, but still want life insurance, consider a term life insurance Joint First To Die policy. A 10 year term JTLD policy is cheap and can help cover funeral expenses or pay for the taxes the CRA wants from your estate when you pass it on.
How long does a life insurance investigation take?
When you file a life insurance claim, your provider starts an investigation that can take anywhere from days to months. It begins with the insurer gathering all the necessary paperwork. Most companies require all paperwork to be submitted between 90 days and 12 months following an individual’s death. The Canadian Life and Health Insurance Association reports that, on average, most payments take about 7 to 10 days to be issued after the paperwork is received.
Can I cash in my life insurance policy?
If you have a permanent or whole life insurance policy, it’s entirely possible to cash it out. If you surrender your policy, you can receive the cash value of the account and do with it as you choose.
If you have a cash value insurance policy, the premiums you pay will be divided into the death benefit pool, the insurers operating costs, and a cash-value account. Over time, the amount divided into the cash value account will decrease, due to the higher costs of insuring the aging individual.
However, you’re probably better off making a withdrawal from it rather than surrendering the policy. If you surrender the policy, it means you’re without life insurance (and therefore there wouldn’t be a death benefit upon your passing). And if you choose to reinstate your policy in the future, it could cost you more than you were paying. You may also be subject to surrender fees or additional taxes if you cash in your policy.
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The bottom line
If you find yourself in a situation where a life insurance policy has been denied, there are still steps you can take. Reach out to the head office of the insurance company and discuss the matter with them, and if you find their response unsatisfactory, you can get in touch with the Obudservice for Life and Health Insurance who can assist you.
If you’re searching for your first life insurance policy, or if you’ve let your policy lapse and are interested in finding a new provider, be sure to get a life insurance quote to ensure you’re getting the best rate possible.
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*Of this amount, $7.7 billion was paid out as death benefits. An additional $4.4 billion was paid out as disability benefits, cash surrenders, or dividends to living policyholders. However, the majority of insurers’ revenues actually go towards insurers’ capital reserves to withstand financial shocks to ensure future payouts are secure and paid.