There are plenty of stories about life insurance companies squirming out of paying death benefits, so I think it’s fair for a person to question if their beneficiaries will really get what they’ve paid for if the pass away.
I’m often asked about the contestability of life insurance claims and what would trigger an incidence of a claim not being paid so let’s talk about several aspects of just that question. Especially when you are over 50 life insurance is something that you should have confidence in. When is that a company can justifiably not pay a claim? When can they adjust the amount paid from the face amount of the policy to a lower amount? When do they have to pay a claim even if you take your own life?
Let’s just set one urban legend aside right now that is especially prevalent with senior life insurance. Life insurance companies do not look for reasons not to pay out what your beneficiaries are due. There is, however, a 2 year contestability period during which, before paying a claim, they will review all of your medical records again (just like they did during underwriting). They may order records that they didn’t see as necessary during initial underwriting just to see if they missed something that could have affected the approved rate class and yes, whether you should have been declined.
If they missed something during underwriting that would have led them to approve you at say a standard rate rather than preferred, they can change the policy to a standard rate policy. The way this would play out is by determining what the policy should have cost (even though it was their error), and charge the difference in premium against the death benefit. So if you had been paying $1000 a year for 5 years on your $250,000 policy and it was determined that you should have been paying $2000 a year, they would deduct that additional 5 years time $1000 and deliver a death benefit of $245,000 to your beneficiary.
There are cases, and thankfully not very many of them, where a reason pops up that would have led the company to legitimately decline you. In my experience this is almost never the fault of lax underwriting, but rather health information that was accidentally or intentionally withheld. Of course intentionally withholding information is fraud and a company has no liability for a claim, but even if the information was just not remembered at the time of application, just like a company can change the rate class, they can also change an approval to a decline. If this happens they return all premiums that were paid plus interest to the beneficiary.
After the two year incontestability period passes, claims are paid without review. Even if death is due to suicide, after the 2 or 1 year (depending on state) suicide clause has been passed, the claim is paid in full.
Bottom line. Will they really pay? They will do everything in their power to pay any legitimate claim fairly and promptly. Paying death benefits is part of their cost of doing business and they have reserves set aside just for that purpose. How companies pay their death benefits is part of their reputation and with so many companies to choose from, if there is any gray area they will always opt for the side of the insured.
Wouldn’t fraud also be grounds for rescinding the policy and refunding premium after 2 years? It happened to me with a disability policy back in the 90’s.