Life Insurance Exclusions to Avoid
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“Life insurance policies are contracts, and like all contracts, many of the important items are often found in the fine print. In the case of life insurance policies, the fine print refers to the body of the contract where exclusions are spelled out as in what instances may negate the policy’s death benefit.”
“Life insurance policies are contracts, and like all contracts, many of the important items are often found in the fine print.”
Insurance companies are in business to make a profit, and one of the ways they ensure their profitability is by limiting their risk.
As long as a life insurance policy is enforced, the company will eventually have to pay out the death benefit. Insurance companies try to protect themselves from paying claims for people who die younger than expected by excluding some causes of death, like suicide or dangerous activities like skydiving.
Learn about these exclusions and how to avoid them.
“Insurance companies are in business to make a profit, and one of the ways they ensure their profitability is by limiting their risk.”
What are life insurance exclusions?
Exclusions are specific items or circumstances which your beneficiaries are excluded from – meaning they won’t receive payment upon your death if you die from certain causes.
Insurance companies limit their risk by the use of exclusions and other terms in the insurance contract. Part of your insurance shopping process should include reviewing actual policies from various companies. Understanding exclusions is important because they can be used to lower the premium of seemingly identical coverage from different companies.
All exclusions are limited by state law, so a good place to begin is your state insurance department. The National Association of Insurance Commissioners website has a map with links to state insurance departments. While each state determines the rules for exclusions in their state, whether they are part of your policy is up to your insurance company.
“Looking for and understanding exclusions is especially important because they can be used to lower the premium of seemingly identical coverage from different companies.”
Life insurance exclusions to avoid
Some exclusions are common and might be able to be avoided if you know what they are. These exclusions include:
- the contestable period
- the suicide clause
- alcohol and drug use
- illegal activity
- dangerous activity
- acts of war
- the aviation exclusion
- misstatement of age
Get to know how these exclusions work.
The contestable period
The first exclusion is not an exclusion per se. It lasts a predetermined time, usually one to two years, depending on your state.
During the contestable period, the insurance company has the right to cancel coverage or deny a claim if they find the policyholder lied or left out information. For example, if somone neglected to mention their high blood pressure, the insurance company has the right to cancel the policy during the contestability period.
The contestable period rules apply to all policies, even those for which a claim has been made. For example, if you forgot to mention your high blood pressure and die in a car accident that has nothing to do with blood pressure. The insurance company can refuse to pay your beneficiaries if your death occurred during the contestability period and the provider can prove you didn’t disclose your high blood pressure.
Material misrepresentation clause
While the contestability period is in force for a specific period of time, the material misrepresentation clause is permanent.
Material misrepresentation refers to intentionally withholding information from the insurer that would have resulted in the provider denying your application. A good example is smoking. This rule, like the contestable period, will even apply in the event of a claim.
“Carefully read your insurance contract before signing. If you are at all uncertain, you need to ask questions.”
Most insurance policy contracts contain the contestable period clause and the material misrepresentation clause.
The suicide clause
The suicide exclusion says that the insurance company won’t have to pay the benefit amount of the policy if the insured commits suicide in the first two years of coverage. The only payment the insurance company will make during this period is the return of premiums paid. This clause protects insurance companies from people purchasing insurance with the intention of committing suicide to provide a financial benefit to their beneficiaries.
Some situations can be sticky, such as a death due to drug overdose. It may be difficult to prove the intention of the individual. In these scenarios, the insurance company is required to prove the death was suicide. It’s not up to the surviving beneficiary to defend the claim.
Alcohol and drug use
This exclusion can cover any cause of death while you are under the influence of illegal drugs or alcohol, even if the cause of death is not related. This exclusion can vary with a range of definitions.
In many situations, this exclusion is used with alcohol-related car accidents that result in death. The insurance policy typically does not include any drugs administered by a physician. So, if an individual passes away during surgery while under anesthetics, the life insurance company would still pay the claim.
This clause can also be used by insurers to reduce premiums, especially if the wording is such that it includes the normal use of legal substances.
If you should die while committing a crime or participating in illegal activity, the insurance company can refuse to make a payment. This clause would apply in situations like if someone was robbing a bank or trespassing across private property and had a heart attack.
“If, say, you were hiking across private property without permission (trespassing) and had a heart attack, you guessed it: your claim could be denied.”
What is dangerous to one person may not seem dangerous to another, so policies usually list what is considered a dangerous and therefore excluded activity, like skydiving or car racing. When this clause does appear, you can often pay an additional premium to have a specific activity removed. If you are an avid skydiver and want coverage, you can pay for that protection.
Act of war
This exclusion is not as common, but it still appears in some policies. This exclusion denies claims for civilians who are killed in wars or by acts of war. Journalists and other people who travel to unstable regions around the world should have this exclusion removed if it appears in their policy.
The aviation exclusion
Typically, this exclusion is for private aircraft only. If you die in a plane crash while you are traveling in a private plane, your death benefit can be denied. You’d still have coverage if you were flying through a public airline.
Misstatement of age clause
Intentionally misstating your age on the application for insurance invokes this clause. Regardless of your reason, even if the misstatement results in a higher premium, the claim could be denied.
Instead of denying the claim, the insurance company may adjust the death benefit to account for the extra premium it would have charged someone of the correct age. In an age where insurance applications are largely filled out online, it would be easy to accidentally input the incorrect birth year. Be careful when applying, and review your information carefully before you submit.
Do life insurance exclusions impact my cost?
You can pay extra to have exclusions removed from your life insurance policy. Take the dangerous activity provision as an example. You can still get a policy, but you’ll pay more if your lifestyle is higher-risk than others.
Your career may also impact the cost of your annual premium. A pilot may need to pay extra to remove the aviation exclusion. Other high-risk jobs include truck drivers, construction workers, utility repairers, loggers and roofers.
Shop around to make sure you find the best coverage for the cheapest price. Your employer may also have access to a group policy for employees in these industries, but make sure you can take the policy with you if you leave the company. Otherwise, you’ll have to buy a new policy at an older age, which can make your premiums go up more.
“Even if the misstatement results in you paying a higher premium for twenty years, it will still end with a denied claim.”