A life insurance contract is a legal agreement between you and the insurance company. You agree to pay a pre-negotiated sum every month, and the carrier agrees to pay your heirs a pre-negotiated sum if you die while the contract is still in force. However, life insurance agreements also contain provisions allowing the carrier to withhold or deny payment of benefits to your heirs if your death occurs under any of several specific circumstances.
If your death occurs within two years after your life insurance policy becomes effective, the carrier has the right to initiate an investigation into the circumstances of your death. Every policy contains this clause in the contract. Denying the payment of life insurance benefits during the contestability period is much easier to accomplish than afterward. Most states allow carriers to maintain a two-year contestability period.
While processing your death claim, if the insurance carrier determines that you committed fraud, it is not obligated to pay benefits to your family. If you intentionally withheld relevant information that would have affected the underwriting conclusions, or if you purposely misrepresented yourself, that is considered fraud and voids the life insurance contract. Even if the issue about which you were fraudulent had no bearing on the cause of your death, the carrier may still refuse to pay benefits.
If your death is the result of suicide, and occurs within the two-year contestability period, life insurance benefits will not be paid. Withholding benefits due to suicide is perhaps the most well-known scenario in which carriers may refuse to pay. However, what most people do not realize is that death as a result of suicide only nullifies the contract if it occurs within the first two years.
All life insurance contracts contain provisions clearly stating that benefits will not be paid if your death occurs during the commission of a felony crime. Insurance carriers may withhold benefits from your family if you get killed while breaking the law, regardless of the actual manner in which you died. This particular contract provision is not subject to the limitations of the contestability period, allowing carriers to nullify your contract under these circumstances at any time.
If you purchase a life insurance policy and are subsequently incarcerated, and your death occurs while in prison, benefits will not be paid to your heirs. The manner in which you die is actually irrelevant in such situations. Insurance carriers may nullify your contract and refuse to distribute policy proceeds to your beneficiaries if you die while incarcerated.
Misstatement of Age
If, during the insurance carrier’s investigation of your death, it is discovered that your age was misstated on original application paperwork, the benefits for which you applied and have been paying are obviously incorrect. In that situation, the benefit paid to your family gets reduced to the amount that would have been purchased with the premium you actually paid. Some carriers, however, will also offer beneficiaries the opportunity to pay the additional premium necessary to purchase the larger benefit that was mistakenly issued in the first place.