5 Things That Won't Happen in Insurance
A life insurance policy is a contract, and just like with any contract, you should read the fine print before signing it. The fine print is where exclusions are disclosed regarding specific circumstances that would not allow the beneficiary to receive the payment on the policy if you die.
When purchasing a new life insurance policy, many people don’t consider that there could be a specific situation in which the policy does not pay out to the beneficiary.
A life insurance policy is a contract, and just like with any contract, you should read the fine print before signing it. The fine print is where exclusions are disclosed regarding specific circumstances that would not allow the beneficiary to receive the payment on the policy if you die.
In other words, you can’t simply take out a life insurance policy and assume you have a guarantee that a certain amount of money will be paid no matter what. Common sense will tell you that it probably doesn’t work like that. Here are seven specific situations in which life insurance will not pay out.
1. You’ve had a child.
The cost of raising a child through age 17 is $233,610, according to 2015 data from the U.S. Department of Agriculture—and that’s not even mentioning college costs if you plan to help out.
If you’ve recently had an addition to your family, your spouse or partner may not be able to afford those costs if something were to happen to you. That’s especially the case if you’re the financial breadwinner.
2. Smoking, or Another Health-Related Issue
The incontestability clause comes into play again if you were somehow less than forthright about your past smoking habits, or if you somehow forgot to mention that you have a condition such as high blood pressure. If the insurance company finds out otherwise during this one- to two-year period, it has the right to cancel your policy.
Asking if you smoke or if you have ever smoked is a pretty standard question on any life insurance application. Maybe you quit smoking a couple of years ago. The insurance company will still ask if you used to smoke and how long ago you quit. It matters because the effects of smoking are long term. Some insurance companies might classify you as a non-smoker if you haven’t smoked for a couple of years. For others, it might take five or 10 years of not smoking before you’re considered a non-smoker.
Where something like high blood pressure is concerned, this is a perfect example of the importance of being completely honest when filling out a life insurance application. Let’s say you don’t mention that you have high blood pressure on your application, and then you die in a manner that seemingly has nothing to do with your high blood pressure — may be in a car accident — within the period of contestability. The insurance company could assert that you did have high blood pressure and that it could have been the cause of your death. See how that works?
Keep in mind, too, that while this contestability period is in force for a specific period of time — typically one or two years — there is also a material misrepresentation clause, and that’s permanent. That clause has to do with intentionally withholding information from the insurance company to improve the chances that your application will be approved. A good example, again, is smoking. This clause still applies even if a claim has already been filed.
3. Illegal Activities
This goes back to that earlier statement about common sense. If you die while committing a crime or participating in illegal activity, the life insurance company can refuse to make a payment. For example, if you are killed while stealing a car, your beneficiary won’t be paid.
Okay. That one’s fairly obvious. But this next point might surprise you. What if you’re doing something illegal and you don’t even realize it? Maybe you’re walking on private property. Trespassing is a crime — even if you don’t know you’re trespassing. Let’s say you’re being chased by a big dog, and you have a heart attack and die. If it turns out that you were trespassing, your claim could be denied.
4. Living Outside of the United States
Here’s one you may not have considered. Let’s say you take out a life insurance policy while you’re living in the United States, and then you move to another country. There could be a clause in the policy that excludes the payment of a death benefit if you are not living in the U.S. at the time of your death. Be sure to look for any mention of this in your contract, especially if you see yourself leaving the U.S. in the near future.
5. You’re thinking about your estate planning
Another top-five reason people get life insurance is to transfer wealth or leave an inheritance. As you get older, you may start thinking more about what kind of legacy you want to leave behind.
If you’ve been focused on other life insurance needs up to this point, it might be time to take another look to see if you would owe any estate taxes upon your death or what other expenses your estate might incur. You may also consider whether you want to leave any money behind for your children or a favorite charity.
If one of these things has happened to you and you’re not sure if you need to increase your coverage, use a comprehensive life insurance calculator to see how your needs have changed.
In most cases, you won’t be able to increase the coverage on your current policy. Instead, you’ll buy a new one to supplement the first. You can do this by reaching out to your insurance professional or shopping around to see if another insurer might offer you a better deal.
Whatever you do, take the time every once in a while to determine whether your life insurance coverage is still enough to take care of the people you love.