Life Insurance: Unpaid Policies And What You Need To Know

Life insurance is an important financial planning tool that provides financial protection to the families of the deceased. However, it is not a perfect system, and there are times when a company has no choice but to decline to pay a death benefit. There are several reasons for this, including unpaid premiums, suicide clauses, and exclusions in the policy. In addition, some policyholders may not have enough coverage or perceive the insurance to be too expensive. Misconceptions about the cost and coverage of life insurance may also prevent families from getting the protection they need. While the percentage of life insurance policies that never get paid out is unknown, it is important to understand the potential pitfalls to ensure that loved ones receive the intended financial support.

99% of term policies never pay out

Life insurance is an important financial planning tool that provides financial protection to those who rely on the insured for financial support. It is a valuable part of an overall financial portfolio, and about 90 million American families rely on it for economic protection, including financial and retirement security. However, there are misconceptions about the cost of life insurance and how it works, which may prevent families from getting the coverage they need.

One common misconception is that term life insurance policies rarely pay out. Indeed, 99% of all term policies never pay out a claim. This is primarily due to policyholders letting their policies lapse. For example, if you purchase a $250,000 20-year term policy, and inflation is about 4% annually, your policy will lose 56% of its value over those 20 years. As a result, the average unclaimed life insurance benefit is $2,000, a far cry from the average policy value of $160,000 in the US in 2015.

However, it is important to note that term life insurance is not the only type of life insurance available. Whole life insurance and universal life insurance are also options to consider when purchasing a policy. Whole life insurance, the most common type, offers the ability to build cash value over time and has the advantage of guaranteed predictable growth. While monthly premiums can be significantly higher than those of term life policies, whole life insurance policies never increase, providing stable rates for policyholders.

Universal life insurance, which includes indexed universal life and variable universal life, also offers distinct benefits. For example, indexed universal life new premiums were $897 million in the third quarter, a 4% increase from the previous year. In contrast, variable universal life new premiums totalled $665 million in the same quarter, a substantial 41% increase from the year before. These figures highlight the growth and popularity of universal life insurance options.

When considering life insurance, it is essential to understand the different types of policies available and their respective advantages and disadvantages. While term life insurance may have a low payout rate, it can still be a viable option for some individuals, especially those seeking a more affordable upfront cost. By weighing factors such as financial stability, dependence on other income sources, and stage of life, individuals can make informed decisions about the type of life insurance that best suits their needs.

Suicide within a certain time frame

Suicide is a tragic event that can have a significant impact on the lives of those left behind. When it comes to life insurance, it's important to understand how suicide can affect the policy and any potential claims.

In the unfortunate event of suicide, the impact on the life insurance policy depends on several factors, including the specific clauses within the policy and the time frame since the policy was taken out. Many life insurance policies include clauses that address suicide, such as the incontestability clause and the suicide exclusion clause.

The incontestability clause allows the insurance company to deny a claim during the "contestability period," which is usually the first two years after the policy's coverage begins. This means that if the insured individual dies by suicide within this time frame, the insurance company has the right to deny the claim. This clause serves to discourage individuals from taking out life insurance policies with the sole intention of financially benefiting their beneficiaries in the event of their suicide.

In addition to the incontestability clause, life insurance policies may also include a suicide exclusion clause. This clause specifically excludes death benefits if the policyholder's death is a result of suicide within a limited period, typically two years after the policy's effective date. This time frame can vary by state, such as in North Dakota, where it is one year.

Therefore, when considering a life insurance policy's coverage in the event of suicide, it is crucial to examine how long the policy has been in place. If it has been less than two years, the claim may be denied under either the incontestability clause or the suicide exclusion clause. However, once the contestability period passes, the claim becomes incontestable unless there are serious issues like fraud or misrepresentation.

While life insurance can provide financial protection and peace of mind, it's essential to understand the specific clauses and exclusions within your policy. Suicide is a delicate and complex issue, and insurance companies must balance protecting beneficiaries while also discouraging any financial incentives for suicide.

High-risk activities and hobbies

Life insurance companies are betting on your longevity. The longer you live, the less likely they will have to pay a death claim. That is why they reward young, healthy people with the best rates based on a long life. So, carriers worry that engaging in high-risk activities and hobbies equates to gambling with your life— resulting in them having to make a premature death payout.

During the application, your insurance company is likely to ask questions about your hobbies, including how often you participate in them and what safety precautions you take. While occasional participation in high-risk activities may not impact your coverage, insurers will still want to know about them when you apply. This is because insurers rate each person individually based on their overall estimated risk.

Some high-risk activities and hobbies that may be considered by insurers include skydiving, BASE jumping, bungee jumping, deep scuba diving, big-wave surfing, hot air ballooning, racing, heli-skiing, rock climbing, hang gliding, paragliding, and power racing. For example, scuba divers may find that their hobby is regarded as high-risk by some life insurance companies due to its fatality rate, resulting in significant premiums among some providers. Similarly, BASE jumping can make life insurance coverage uniquely difficult to obtain, with some companies refusing to consider it at all. In contrast, other providers may offer coverage for BASE jumping but at higher premiums.

If you engage in high-risk activities and hobbies, you may still be able to obtain life insurance, but your options may be limited, and you may have to pay higher rates. Some companies will flat-out deny you a policy, while others will charge you much higher rates. Certain providers offer specific coverage for risky hobbies, but this may increase premiums or require special coverage. It is important to be honest about your participation in high-risk activities and hobbies when applying for life insurance, as failing to disclose them may be considered fraud and affect your coverage if you die while participating in these activities.

Illegal activities

Life insurance companies may also deny coverage for deaths resulting from illegal drug overdose or drunk driving. Additionally, policies may exclude coverage for practices and hobbies that are considered high-risk, such as skydiving.

Insurance fraud is another illegal activity that can result in denied claims. This includes staging deaths or accidents, providing forged or altered documents, and concealing information about pre-existing medical conditions, lifestyle choices, or other relevant information. Fraud costs the life insurance industry $10-20 billion each year and can drive up premium costs for honest policyholders.

It is important to note that the specific exclusions and conditions of life insurance policies can vary, and it is essential to read and understand the contract before signing up for a policy. While the majority of life insurance policies do pay out, understanding the terms and conditions of your policy can help ensure that your loved ones receive the financial protection they need.

Non-payment of premiums

If you fail to pay your life insurance premiums, your policy may lapse. This means that the protection and coverage offered by the policy are no longer in force, leaving you and your loved ones financially vulnerable. Most insurance companies provide a grace period, typically 30 days, after the due date before they cancel your policy. However, once the grace period ends, the policy may be terminated, and you will need to reinstate it or purchase a new one.

Reinstating a lapsed policy can be a complex process, and many policyholders choose to buy a new policy instead. If you decide to reinstate your old policy, you may need to pay late fees and penalties. Additionally, you may be required to undergo a medical examination before your policy can become active again. On the other hand, purchasing a new policy will result in a higher premium.

To avoid non-payment of premiums, it is essential to consider your budget when choosing coverage and set up automatic payments. Understanding your reinstatement options is also crucial. By staying on top of your premium payments and keeping your policy active, you can ensure that your loved ones remain financially protected.

Frequently asked questions