10 Reasons Why Life Insurance Won’t Pay Out

Life insurance can provide peace of mind by offering financial support for your loved ones after your death. Whether you establish a life insurance trust, a life insurance retirement plan or have a run-of-the-mill universal policy, the idea is to ensure the financial stability of those you leave behind. However, there are numerous scenarios wherein insurance companies can void policies or refuse to pay out claims.

If you’re searching for life insurance for beginners, read on to learn about 10 reasons your insurance company might not pay out your life insurance policy.

For what reasons will life insurance not pay out?

When you have the best life insurance, you expect your beneficiaries to receive a payout upon your passing. Afterall, a life insurance payout is the principal motivator for most people to secure a life insurance policy. But there are certain situations when your insurance company does not pay out your policy. In this section, we detail 10 of those circumstances to help you avoid falling victim to any of them.

1. Life insurance fraud

One of the most prominent issues in the life insurance industry is fraud. There are innumerable life insurance scams, and the industry is plagued by individuals seeking to deceive insurance providers for personal gain. There are several ways you could commit insurance fraud, including:

• Concealing information by hiding pre-existing medical conditions, lifestyle choices, dangerous activities or other relevant information that could affect your eligibility or premium rates;

• Staging deaths or accidents to make it appear as though the insured person has passed away; and

• Providing forged and altered documents, such as medical records or policy details, to support false claims or applications.

This type of fraud results in financial losses for insurance companies, impacting the entire insurance industry as well as honest policyholders. As a result, it can drive up premium costs and erode trust in providers.

Insurance companies employ various measures to counter life insurance fraud, such as enforcing thorough underwriting processes, investigating suspicious claims and collaborating with law enforcement agencies. When there is evidence of deliberate fraud, the insurance company will deny the claim.

2. High-risk activities

Many people enjoy engaging in extreme activities like race car driving, skydiving and flying aircraft. While those actions may be adrenaline-pumping, they’re not ideal when it comes to your life insurance policy. Although high-risk life insurance is available, engaging in those activities during the underwriting process without first informing your provider could jeopardize the validity of a policy.

Some insurers may view participation in these high-risk activities as a material omission. As a result, the insurance company could reject claims involving them. Of course, having a life insurance policy doesn’t mean you can’t participate in these activities. Be clear with the insurance company about your plans to continue to enjoy them.

3. Homicide of the insured by the beneficiary

The thought of a beneficiary committing homicide to gain a life insurance payout may seem like a Hollywood movie plot, but it can occur. In the event that the policyholder is murdered, the insurer will conduct an investigation to determine if there’s reasonable suspicion of the beneficiary’s involvement in the death. If there’s evidence the beneficiary was complicit, the insurer will withhold the payout.

Situations like these regularly involve law enforcement as well as the provider’s fraud department. Sometimes, a beneficiary’s involvement may be a misunderstanding. Clarifying these cases prevents any unjustly acquired benefits. If the beneficiary was responsible for the insured's death, the payment will go to the next beneficiary listed in the policy.

4. Suicide clauses

Many life insurance policies contain suicide clauses. For example, there may be a waiting period before the company will make a payment upon death. Often, these periods span the first two years of coverage and the provider can deny the claim if you take your own life during this time.

Denying a life insurance policy payout to beneficiaries may seem harsh, but it prevents policyholders from resorting to self-harm to secure payouts. After the waiting period has expired, these life insurance policies usually cover death by suicide. While the beneficiaries may not receive the full death benefit, they could receive the paid insurance premiums from the provider. However, these payouts depend on the insurer and the type of policy.

5. A term life policy expired

Not all life insurance policies offer coverage in perpetuity. Term life insurance only covers you for specific amounts of time. Term policies typically last 10, 20 or 30 years, and coverage ceases at the end of the term. If you die after the term concludes, there won’t be a payout to your beneficiaries. In order to avoid gaps in coverage, review your life insurance policies annually and be aware of the expiration dates.

6. Policy lapse due to overdue premiums

To ensure your beneficiaries receive a payout upon your death, you must continuously pay the life insurance premiums on time. If you fail to pay, it can result in a policy lapse and leave the coverage inactive. If you die during the lapsed coverage period, the insurer can deny any death benefits. Always note life insurance premium due dates and make prompt payments to avoid loss of coverage.

7. Illegal activities

Generally, life insurance policies exclude coverage for deaths arising from participation in illegal activities or criminal behavior. Additionally, in some instances, the insurance provider could deny coverage for a death resulting from an illegal drug overdose or drunk driving.

8. Death by acts of war

After the attacks on Sept. 11, 2001, a significant shift occurred in the life insurance landscape, leading to the incorporation of provisions excluding coverage for deaths stemming from acts of war or terrorism. This adjustment recognizes the heightened uncertainties and financial complexities of these catastrophic events. As a result, an insurance company may deny claims if circumstances related to war or terrorism contributed to the death.

9. The insured moved outside of the country

Life insurance policies purchased in the U.S. may not provide coverage worldwide. Certain life insurance policies have limitations based on location, meaning the policy could be voided if you relocate to a high-risk or excluded country. When preparing for an international relocation, familiarize yourself with geographic limitations that could affect your policy’s coverage. Doing so will reduce the risk of encountering complications or denied claims.

10. A new beneficiary wasn't added after a divorce

Some states require life insurance companies to automatically drop a former spouse as a beneficiary from policies after a divorce. In those cases, you would have to name a new beneficiary for the plan, even if that person is still going to be your former spouse after they were dropped.

If a beneficiary is not named, the policy won’t pay out. However, if the policy is through a group life insurance plan (e.g., an employer-paid plan), it’s likely that your life insurance falls under federal retirement income protection laws that would supersede state laws. In that case, your former spouse won’t need to be renamed.

Summary of Money’s 10 reasons life insurance won’t pay out

Life insurance is subject to various factors that can impact whether or not a policy is paid out. Some of the top reasons for a claim to be denied include fraud, high-risk activities, suicide clauses, policy expiration and the possibility of beneficiaries’ involvement in the insured’s death. Policy lapses due to overdue premiums and engagement in illegal activities also affect coverage. Insurance implications may also arise if your death results from acts of war or your relocation to another country that isn’t approved by the insurer. Regularly review and maintain your life insurance policies to ensure they align with changing life circumstances.