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A family is under a raining umbrella.
Martín Elfman for Money

What can add to the emotional pain of a death in the family? For an unfortunate few, it’s denial of life insurance benefits they were relying on to help fill the financial gap created by the loss of their loved one.

Life insurance is nearly always settled as expected. According to the American Council of Life Insurers (ACLI), fewer than one in 200 claims are denied. But that’s of little comfort to beneficiaries who don’t collect on policies, especially since settlements for death benefits tend to be all-or-nothing transactions. Typically, when a claim is denied, the full amount isn't paid out, says Juan Carlos Cruz, founder of the Brooklyn-based Britewater Financial Group. “There is no partial payout.”

Here’s what you need to know about claim denials for a life insurance policy, including what you or your loved ones can do now to minimize ever receiving one.

What prompts life insurance denials?

Knowing what commonly triggers an insurer to deny a claim can provide helpful insight into the decision. Here are some of the most common reasons for denial, along with advance steps that can help to head them off.

An incomplete or misleading application

The number one way to ensure your loved ones get the life insurance benefits you’ve paid for is to be complete and honest when you take out the policy. To omit facts or submit any type of false information about the policyholder is to risk the denial of a claim.

A leading issue is problematic reporting of medical history, and not only for the policyholder. Cruz cites the misstatement of your parents’ causes of death, information that most applications require. If you reported that both parents died of unspecified natural causes, when one actually died young of heart disease and the other of cancer, you have committed fraud, and for an outcome that does not favor the company. If the omissions were to be found in the course of settling your claim, especially with a fairly new policy, it could lead to a denial.

Failure to fully and accurately report other personal data can also be problematic, according to Justin Lovely, founder of The Lovely Law Firm in Myrtle Beach, South Carolina. Life insurance applications typically require you to submit detailed information on your income, hobbies, criminal history and habits -- including on your consumption of alcohol and illicit drugs, and whether you indulge in dangerous pursuits such as scuba diving.

Fast forward to your accidental death in, say, a scuba-diving accident or from a drug overdose. While settling the claim on your insurance, Lovely says, the insurer may cross-reference the circumstances of your death against the application questionnaire you submitted to get the policy.

“If the insurance company discovers information that was not included in the application, they often try to deny the claim if those inconsistencies can be positioned as pertinent contributing factors,” says Lovely.

Company claims about misrepresentation are likely to be most damaging during what's know as the policy's contestability period. Typically two years after the policy is issued, this is the time during which the issuer is the most able to challenge the accuracy of information and to deny coverage. After the contestability period ends, according to the AARP, life insurance coverage is usually considered incontestable. However, the association also notes that "some policies have exclusions, or situations in which a benefit may not be paid," so it pays to check the fine print to confirm contestability provisions.

Failure to pay premiums on time

All too often, a policyholder who is ill or elderly falls behind on paying their premiums. As a result, the policy may lapse due to non-payment. If a claim comes in after such a lapse, it may be denied by the company.

There are, however, requirements that the insurer must meet before such cancellations, and “you may have a claim that the insurance policy should not have ended the coverage,” according to New York City-based life insurance attorneys Trief & Olk. While the rules vary by state, the insured must typically be warned that the policy is in danger of expiring and be offered a grace period during which the overdue premium can be paid and the coverage restored.

Some diligence in advance can help head off non-payment complications later. Trief and Olk recommends that those who are assisting an ill or elderly family member or friend who has life insurance “keep an eye out for invoices or statements to make sure that any premiums are paid on time.” Some policies, the firm says, include a provision called a waiver of premium, which “allows the insured to stop paying the premiums if the person is very ill -- on the assumption that the person might not be working and, as such, is unable to afford the premium payments.”

Also, the lawyers add, “if the person is going through financial hardship, the insured should contact the insurance company to see if the premium can be waived.”

Alcohol and drug use before death

Certain states allow the denial of a life insurance claim due to the insured having alcohol or illicit drugs in their system. (According to Life Insurance Attorney.com, those states include Alabama, Alaska, Arizona, Arkansas, Delaware, Florida, Georgia, Hawaii, Idaho, Kansas, Kentucky, Louisiana, Maine, Mississippi, Missouri, Montana, Nebraska and New Jersey.)

Here, too, there are limits to such denials. “It is unlikely that an insurer can deny coverage simply because it is found that the insured had some alcohol in their system,” Life Insurance Attorney.com writes. But if the intoxication is deemed to have caused the death, you could be denied the benefit. The site notes that the language found in alcohol exclusion policies is typically as follows:

“The insurer shall not be liable for any loss sustained or contracted in consequence of the insured’s being intoxicated or under the influence of any narcotic unless administered on the advice of a physician.”

These exclusions underline the need to read the fine print on your policy, or that of a loved one, to be aware of what drug and alcohol provisions are in place.

A suicide during the policy's contestability period

Contrary to popular knowledge, a death from suicide isn’t necessarily a reason to deny a life insurance claim. But such a determination can be problematic if the death occurs soon after the purchase of the policy -- during the contestabiliity period, which is typically two years.

“There is a clause that states if the insured dies within the stated number of years, depending on the company, the death benefit will not be paid out,” says Cruz. “In the case of suicide, if you fall inside of the restricted time period, the insurance company would [not pay the death benefit and] just return all the premiums paid back to the beneficiaries.”

What can prompt a partial payout

Rare as partial denials of death benefits are, several other factors can make the payout from a loved one’s policy less than you expected, Cruz says.

The first is that the insured person borrowed a loan against the policy. If the insured dies before the loan is paid off, “the company will deduct the loan plus interest from the claim amount, giving the perception that a partial payout was given,” Cruz says.

The second reason benefits may fall short of expectations is that the policyholder elected to access the death benefit early, due to the financial pressure of a chronic or terminal illness or permanent disability. Under many policies, such “living benefits” are allowed to cover the costs of treatment or for other quality-of-life expenses.

However, as Cruz points out, if beneficiaries are not aware that the benefit has been tapped in either of these ways, it may give the impression that the insurance company has unfairly delivered only a partial payout.

How to get help with an insurance denial

Besides doing your homework in advance, you should carefully scrutinize the letter in which the claim was denied. If there are aspects of he decision that you don’t understand, reach out to the company or your insurance agent for clarification.

An independent agent may be especially willing to intervene on your behalf with the company, at least to assist with clarifying the reasons for the denial. Another potential resource is the Insurance Commissioner in your state; most of these officials have a consumer-assistance resources or counselors to help people navigate their insurance policies, including with claims.

If you’re still striking out, consider hiring an attorney. A number of firms specialize in appealing life insurance denials. They typically operate on a contingency basis -- as in, they charge little or nothing upfront but take a percentage of any settlement. To help decide if it’s worth hiring an attorney, and for names of reputable firms they may recommend, you could tap other financial professionals in your life, such as your financial advisor.

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