Contested Life Insurance Policies

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Why Can an Insurance Company Contest My Life Insurance Claim?

There are a number of reasons why a life insurance policy might be contested after the death of the policy holder, and it is not uncommon for an insurance company to look for any legal reason it can not to pay out a benefit.  While normally a benefit will be paid out within several weeks of the death of the insured, the most typical reasons for delaying or denying payment are as follows:

  1. There are questions involving whether the policy was "in force" at the time of death:  Although there are many types of life insurance policies, all of them require a steady payment of premiums to remain in force.  But if the payment is late, a premium is missed, or a term life insurance policy's term has ended, then this can invalidate the entire claim, even if you have been paying premiums it for years.  This is the most common reason for denying benefits. 

    However, even if premiums on the policy were not currently being paid, the company may have failed to send the necessary notices of cancellation, or be able to prove it had sent such notices, in which case it may be possible to recover on the policy.  In the case of term life insurance, many states have rules requiring insurance companies to offer a client a chance to renew his term policy before they are allowed to cancel it.
  2. The policy is less than two years old:  Most life insurance companies will have a two year "contestable period" when activating a new policy, which means that if the insured dies within those two years, the company may rescind the policy if it discovers fraud or misstatements made in the application for insurance.  The misstatements must be material, however, meaning that they must be of great enough nature to have caused the company to alter or deny your coverage (misstating your eye color or height wouldn't matter, but not mentioning a heart condition would). 

    Surprisingly, once this period has passed, the insurance company can usually not refuse to pay out a benefit, even if the application was made as a result of gross fraud.  However, the company can adjust the benefit to coincide with what a person would have received if they had told the truth (i.e. an 80 year old saying he was 50 will only receive the benefits that would have been granted to an 80 year old).  There are some exceptions to this rule.
  3. The death is the result of suspicious circumstances:  This is usually cited if there is reason to believe that one of the beneficiaries may have been involved in the death, or that the insured person himself committed suicide.  Most insurance policies have clauses exempting coverage for people who commit suicide, and obviously no benefits go to anyone involved in the death of the insured, so payments may be withheld pending a full police report.  It should be noted, however, that most policies do NOT consider doctor performed euthanasia as "suicide."
  4. Ambiguity in the policy itself:  Often a policy will name the insured's children as beneficiaries.  But if the children die (and have their own children), do the grandchildren get the share their parents would have gotten, or should it be split up among the remaining heirs?  What if if only some children are named in the policy, but the others were born after it was written, should they have a share? 

    The insurance company will usually try to determine who should receive the proceeds in situations like these. If this cannot be done, it will hold the proceeds until the proper legal authorities can make the decision for them.  In situations like this, an attorney will be essential if you are to fight for your claim of the benefits, as the insurance company may very well cave in to whichever family member has the most potent lawyer.
  5. Fraud:  While, as noted above, most fraudulent applications must be discovered within two years for the company to rescind a policy, some states do not allow you to lie about your age or smoking habits, or to send in an impostor for your medical exam.  If these things are discovered at the time of death, a company may, depending on the state, refuse or reduce benefits. 

It is important to realize that a delay in payment does not automatically mean a refusal to pay.  There are many reasons why an insurance company may need extra time to ensure that the policy is being carried out correctly, and in most states the company MUST pay you interest for the time it withholds the money.  On top of that, excluding criminal investigations, an insurance company can often issue its local office to write an advance check to cover any immediate needs (funerals, etc...) while it concludes its investigations.  But if these measures prove not to be enough, and the insurance company is dragging it's feet in paying the benefits, you will want to contact an attorney.

Do I Need an Attorney?

Many families faced with the loss of a family member base their entire futures on the benefits they expect to receive from their life insurance.  Suddenly faced with a company refusing to pay the money you need can be devastating.  If you are up against an insurance company you think is wrongly denying your claim, you should consult an insurance law attorney to find out how you can fight the company and get your money now.

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Last Modified: 09-08-2011 04:30 PM PDT

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