Life Insurance Policy Problems

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What Are Common Life Insurance Policy Problems?

While many people have life insurance policies, the policies themselves can be difficult to understand and full of arcane language. When it finally comes time to cash in the policy, people are often unprepared for the problems and loopholes that an insurance company might suddenly find in order to avoid paying a claim. Below are some of the most frequently-asked questions about problems with life insurance policies.

Can My Insurance Company Automatically Cancel My Policy If I Have Missed a Payment?

No. The law in every state mandates that all insurance companies must inform a policy holder that a payment for their policy has been missed, and then provide a grace period, of varying length which depends on the type of insurance, during which the holder can pay and resume their coverage. Since life insurance is generally for larger amounts of money than other types of insurance, the grace period in most states is rather long, usually around thirty days. That means the insurance company must give you some time to pay off your late premium before they can 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, usually in exchange for a hefty fee, at their own discretion.

What an insurance company may NOT do is to allow you to miss a payment, or ignore a missed payment, without notifying you about the 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. Doing so would be acting in "bad faith," and it could be the basis of a civil lawsuit. 

Can a Life Insurance Company Cancel My Policy?

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. Even with fraudulent misrepresentation, the fraud must be "material". 

This 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). When that term ends, then so does the policy. 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, such as race or gender. 

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 the company does 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.

How Does Divorce Affect a Life Insurance Policy?

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 these states, after getting a divorce, the policy holder would have to either file a new beneficiary designation or  mention in the decree itself that he intends his former spouse to remain a beneficiary. 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?

You do not need to, and it may be helpful to not do so. 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. Doing so can also create problems if your insurance company and your will have different beneficiaries listed. If you do list the beneficiaries in your will, the benefit will have to go through complicated probate hearings, whereas an insurance company can just pay the beneficiary directly.

Do I Need a Lawyer If I Need Help with a Life Insurance Policy?

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 a lawyer at once to see what your rights are and if you can sue for damages.

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Last Modified: 09-15-2014 02:08 PM PDT

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