Reasons your Life Insurance Claim May be Denied

I would imagine that those who are choosing to read this post belong to one of two categories: (1) people who are waiting to find out if their claim for life insurance benefits has been approved and are worried that it may be denied (hoping for the best but preparing for the worst); or (2) people who have received a denial of their life insurance claim and don’t really know why. What these two categories of readers usually have in common is that they have a distrust of life insurance companies (or insurance companies in general) and want to better understand what is happening so they can prepare to fight. This post encompasses the five most common reasons that life insurance claims are denied but explains them in a way that a normal person can understand. 

1. NO COVERAGE

First and foremost, a life insurance claim may be denied because there was never any coverage issued. This might seem straightforward, but there are numerous circumstances where a customer may have no idea that their coverage was never in effect. One of those ways is where the insured passes away shortly after applying for life insurance coverage. Generally speaking, policies don’t go into effect until the first premium has been paid and the policy was delivered. If those two requirements were not met, it is likely that a claim will be denied due to the fact that the policy never went into effect. 

Second, a policy may not go into effect if an agent fails to complete and submit necessary paperwork to get the coverage issued. An agent or a broker serves as the middleman between you and the insurance company. If the agent collects information or the first premium but fails to give that information or money to the insurance company prior to the insured’s death, the policy will not go into effect and your claim will be denied. 

Third, your claim could be denied because the underwriting process was never completed prior to the insured’s death. Underwriting is where the information provided during the application process is reviewed by the insurance company, additional information is gathered, and the risk of insuring the applicant is determined. The amount of thoroughness in the underwriting process varies depending on the type and value of the policy being applied for. Some companies offer temporary coverage which will be triggered if the insured dies during the underwriting process. However, if there is no temporary coverage in place, and the insured dies during the underwriting process (before the policy has been issued), a claim for life insurance benefits will be denied. 

2. LAPSE

If you have ever had any type of insurance, you have likely heard the term “lapse” before. Basically, insurance coverage will lapse if the insured person or owner of the policy stops making premium payments for any reason. Afterall, you don’t get something for nothing. In the life insurance context, an insured person will usually be given a 30 day “grace period” to make up the missed payments and keep the policy in force. If the insured dies within the 30-day grace period, the insurance company is usually still required to pay death benefits. However, if the insured dies outside of the grace period and does not submit the missed premium payments, the policy will have lapsed, coverage will have ended, and a claim for life insurance benefits under the policy will be denied. 

3. MISREPRESENTATION

In my post titled “Three Simple Ways to Ensure That Your Policy Stays in Force” I talked about how half-truths are considered lies to a life insurance company. Half-truths or misleading information are the number one way to doom a life insurance policy from the beginning. The burden, however, falls on the person completing the application, usually the insured or the owner of the policy. During the application process, the applicant will likely be asked about their current medical condition as well as their medical history. The insurance company has two years from the date of the application to determine whether any of that information is inaccurate, a half-truth, or misleading. This two-year period is called the “contestability period.” If the insured dies within the contestability period, the insurance company can and will conduct a thorough investigation into the information provided on the application to ensure that everything was correct. 

I am often asked whether there is anything a beneficiary can do to stop the insurance company from conducting a contestability investigation. Unfortunately, the answer is no. By refusing to provide information or authorization to the insurance company, all you have done is put your claim on hold and delayed the inevitable. What you can do, however, is contact an attorney to help you through the process to ensure that the insurance company is staying within their rights, that the documentation is received and reviewed in a timely manner, and assist you with completing a recorded beneficiary statement with the insurance company if required. 

If the insurance company finds during their investigation that information on the application was incorrect, they will deny a claim for life insurance benefits. A letter will likely come in the mail which cites to “material misrepresentations on the application” as the basis for their denial. At that point, if you wish to fight the denial of your claim, you should contact a life insurance attorney in your state to assist you with appealing the denial. 

4. FRAUD

Nearly every claim packet I have ever seen contains a statement similar to this: “Any person who knowingly presents a false or fraudulent claim for the payment of a loss is guilty of a crime and may be subject to fines and confinement in prison.” Basically, if you intentionally lie to the insurance company in making a claim for life insurance benefits, you may have committed fraud, which is a crime. Don’t commit fraud. It’s really not more complicated than that. 

5. BENEFICIARY DISPUTE

At any time prior to the insured person’s death, they generally have a right to designate a beneficiary to the policy. A beneficiary is the person who will receive the life insurance benefits after the insured’s death. There are a number of reasons why a beneficiary designation may be in dispute: (1) the insured did not correctly complete and submit the beneficiary change prior to his/her death; (2) the beneficiary designation form is unclear; (3) a divorce occurred which may disqualify an ex-spouse as a beneficiary; (4) it may be believed that the insured was improperly persuaded or coerced into changing the beneficiary; (5) there is conflicting information regarding who the insured wished to have benefit from his/her policy after death. 

Oftentimes, if the insurance company determines that there is more than one viable claim to the death benefits, they may file an “Interpleader” action. An interpleader is a formal court process that insurance companies use to determine who the rightful beneficiary is to the life insurance benefits. An interpleader is similar to a regular lawsuit in that it requires filings, discovery, and hearings. However, the insurance company benefits by being able to deposit the funds in dispute and withdraw themselves from the action entirely while also collecting reasonable attorney’s fees from the amount of money in dispute. Please note that interpleader actions, and any formal legal proceeding requires immediate attention. If you are not ready, willing, and able to represent yourself in a legal proceeding, you should contact an attorney as soon as possible. 

If your claim has been denied for any of the above reasons, don’t give up. Instead, consult with an insurance denial lawyer to see if you have any viable course of action.