Life Insurance Policy Problems

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What are Life Insurance Policy Problems?

While many people have life insurance policies, the policies themselves can be difficult to decipher and full of arcane language.  And when it finally comes time to cash in the policy, often people aren't prepared for the problems and loopholes that an insurance company might suddenly find in order to avoid payment.   Below are some of the commonly asked questions about problems with life insurance policies.

I've Missed a Payment on a Premium.  Can My Insurance Company Automatically Cancel the Policy?

Not automatically, no.  The law in every state mandates that all insurance policies must inform the policy holder that a payment has been missed, and then provide a grace period (of varying length depending on the type of insurance) during which the holder can pay and resume their coverage.  Because life insurance is generally for larger amounts of money than normal insurance, the grace period in most states is somewhat long, usually around thirty days.  That means the company must give you some time to pay off your late premium before they terminate your coverage.  

Although the law does not require it, some companies may allow you to reinstate a terminated policy even after the grace period (probably for a hefty fee), but again this is at the discretion of the insurance company.

What an insurance company may NOT do is to allow you to miss a payment (or ignore a missed payment), and then use that as an excuse to refuse to pay out your policy when you try to cash it in years later, as that would be acting in "bad faith" and could be the basis of a lawsuit. 

Can a Life Insurance Company Cancel my Policy?  For What Reasons?

Once a policy is issued, a company can forcibly terminate it in very few ways; generally only because you either missed a premium payment or made some kind of serious fraudulent misrepresentation when applying for the policy (and even there, the fraud must be "material"). 

This obviously does not apply to the natural end of a term life insurance policy, which only insures a policy holder for a set term (5 or 10 years, for example).  Obviously, when that term ends, then so does the policy.  And while most companies offer plans to renew the term once it ends, an insurance company can refuse to renew it for any reason not protected by law (race or sex, for instance). 

However, some states do insist that companies offer to renew certain types of insurance to customers whose terms have lapsed, or at least insist on an early warning if they do not intend to renew a policy.  If a company has failed to do this, it may be liable for damages, so you should contact an attorney if you feel your insurance was unfairly revoked.

I am the Beneficiary of my Ex-Spouse.  Although He Never Changed the Policy, I Did Not Receive Anything Upon His Death

Although varying state by state, divorce decrees can automatically cancel the designation of a spouse as the beneficiary of a life insurance policy, even if the policy holder made no specific attempt to do so (in Michigan for example).  In these states, after getting a divorce, the policy holder would have to file a new beneficiary designation, or would have to mention in the decree itself that he intends his spouse to remain a benficiary.  Otherwise, the insurance will be paid out to whoever else is a beneficiary, or to the deceased's estate.

Should I Designate My Beneficiaries in my Will?

Absolutely not!  While it is certainly legal to do so, altering a will is a much more complicated affair than altering the beneficiary of a life insurance policy.  It is much easier to simply fill out the company forms to change your policy then to have to redraft your entire will.  It can also create problems if your insurance company and your will have different beneficiaries listed.   And if you do list the beneficiaries in your will, the money will have to go through complicated probate hearings, whereas an insurance company can just pay the beneficiary directly.

Do I Need an Attorney?

Life insurance policies are often the sole means of support for a family after the primary caregiver has passed away.  If you feel you have been slighted by an insurance company, or they refuse to pay out for questionable reasons, you should contact an insurance law attorney at once to see what your rights are and if you can sue for damages. 

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Last Modified: 11-22-2011 04:37 PM PST

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