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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. Exclusions are exactly what they sound like: specific items or circumstances which your beneficiaries are excluded from – meaning they won’t receive payment on them upon your death.
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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.
Insurance companies are in business to make a profit, and one of the ways they ensure their profitability is by limiting their risk.
That may sound a little odd at first; since no one lives forever, 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.
Insurance companies are in business to make a profit, and one of the ways they ensure their profitability is by limiting their risk
Insurance companies limit their risk by the use of exclusions and other terms in the actual insurance contract – the fine print. Part of your insurance shopping process should include reviewing actual policies from various companies. Looking for and understanding exclusions is especially 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 the insurance departments of all 50 states and US territories. While each state determines the rules for exclusions in their state, whether or not 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
The first exclusion is not an exclusion per se but more like an engagement called “The Contestable Period.” During a predetermined period of time, usually two years from issue, the insurance company has the right to cancel the coverage or deny a claim if they find that an omission was made at the time of application. That means, for example, if on your application you “forgot” to mention your high blood pressure, the insurance company has the right to cancel your policy if they find out during the contestability period.
The contestable period rules apply to all policies, even those for which a claim has been made. So let’s say you forgot to mention your high blood pressure and are then killed 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 they can prove you didn’t disclose your high blood pressure.
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 them not insuring you. 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 with the remaining exclusions in some policies and not in others.
- 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. In the event of suicide within this period, the only payment the insurance company will make 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.
- Alcohol and Drug Use: This exclusion can be tricky since it can cover any cause of death that occurs while you are under the influence of illegal drugs or alcohol, even if the cause of death is not related to the use of drugs or alcohol. This exclusion can vary from policy to policy and company to company with a range of definitions. And this clause can be used by insurers to reduce premiums, especially if the wording is such that it includes the normal use of legal substances.
- Illegal Activity: This clause is pretty straightforward. If you should die while committing a crime or participating in an illegal activity, the insurance company can refuse to make a payment. This clause means that if you are killed while you are participating in a bank hold-up, your beneficiaries will not be paid. This clause would also apply if, say, you were hiking across private property without permission (trespassing) and had a heart attack; you guessed it: your claim could be denied.
If, say, you were hiking across private property without permission (trespassing) and had a heart attack, you guessed it: your claim could be denied.
- Dangerous Activity: What is dangerous to me, may not seem dangerous to you. Which is why, when this clause is in a policy, it usually lists what is considered a dangerous and therefore excluded activity, like skydiving or car racing. When this clause does appear, you will often have the opportunity to pay an additional premium to have a specific activity removed. This means if you are an avid skydiver and still want be covered, you can pay for that protection.
- Act of War: This exclusion is not as common as it once was, but it does still appear in some policies. This exclusion is not expressly intended to exclude soldiers; its purpose is to deny claims for civilians who are killed in wars or by acts of war. Journalists and other people who often travel to unstable regions around the world should look to have this exclusion removed if it appears in their policy.
- Aviation Exclusion: Typically speaking, this exclusion is for private aircraft only. If you die in a plane crash, for example while you are traveling in a private plane your death benefit can be denied.
- Misstatement of Age Clause: A few days, a few months or a few years, older or younger, it’s all the same thing. Intentionally misstating your age on the application for insurance invokes this clause. Regardless of your reason, even if the misstatement results in your paying a higher premium for twenty years, it will still end with a denied claim.
even if the misstatement results in your paying a higher premium for twenty years, it will still end with a denied claim
Whether you call them loopholes, technicalities, or fine print exclusions, you can’t afford to ignore the particulars of your life insurance policy. You don’t ever want to be responsible for compromising the benefits you intend to leave behind for your loved ones.
My sound advice is simple: Carefully read your insurance contract before signing. If you’re at all uncertain, you need to ask questions.
Summing Up: The Most Common Life Insurance Exclusions
- The Contestable Period
- Material Misrepresentation
- Alcohol and Drug Use
- Illegal Activity
- Dangerous Activity
- Act of War
- Aviation Exclusion
- Misstatement of Age