Death benefit denied? What to do if a life insurance company rejects a claim

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It’s hard enough to lose a loved one. But what can you do if your loved one’s life insurance company won’t pay a death benefit?

“If the claim is denied or delayed, try to find out why. Don’t let the insurance company give you the runaround.”

— Brendan Bridgeland, board member of the Center for Insurance Research

It doesn’t happen very often. “Unlike disputed auto or property claims, such instances are extremely rare in life insurance for the obvious reason: It’s hard to fake being dead,” says Brendan Bridgeland, former executive director and now board member of the Center for Insurance Research, a nonprofit consumer organization based in Cambridge, Massachusetts.

That said, when it does happen, families and heirs are often ill-prepared to challenge a claim denial. In fact, their blind pursuit of answers can sometimes do irreparable harm to their case.

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Why won’t the insurance company pay up?

Here’s what you need to know about the life insurance claim process and how best to challenge a denied claim.

There are 4 key reasons that a life insurer may question or deny Uncle Ted’s death benefit:

  1. He failed to pay premiums on time, causing his policy to lapse. “The main reason a company will deny a death benefit is because coverage is not in force on an individual upon which the claim is made,” says Jack Dolan, spokesman for the American Council of Life Insurers, a Washington, D.C.-based trade organization. “Sometimes people let their policies expire and don’t inform their beneficiaries of the lapsed coverage.”
  2. He lied or otherwise made a “material misrepresentation” on his application. “In life insurance, the 2 things that affect pricing are your health and age,” says Bridgeland. “If he said he was 40 instead of 45 on the application, they may not cancel the policy, but they may subtract the additional premium due from the benefit amount.”
  3. His death fell outside the scope of coverage. Although exclusions have been disappearing from policies in recent years, most policies still exclude suicide within the first 2 years of coverage and certain accidental deaths, such as during the commission of a felony. Older policies also may exclude death during military service, acts of war, aviation, dangerous pastimes such as scuba diving and mountain climbing, and health perils such as HIV.
  4. His family or heirs failed to provide the necessary documentation. “What you’re most likely to encounter is the paperwork requirement,” says Bridgeland. “Even at the simplest level, a death certificate, it’s not enough to say, ‘Ted died.’ That’s not going to start the payment process.”

Don’t accept denial

If the claim is denied or delayed, try to find out why. Don’t let the insurance company give you the runaround, Bridgeland says.

“Contact your state’s department of insurance or attorney general. It doesn’t take much more than a call from the state, and it’s going to clear up very quickly and not cost you any legal fees,” he says. “But if the insurer fails to respond within a reasonable time or denies a claim you feel is valid, you should contact a lawyer.”

And the sooner the better, according to David Spain, an attorney with Morgan & Morgan law in Orlando, Florida, who specializes in denied insurance claims.

“As soon as you get a denial or have not received a favorable result, you need to reach out to a contingency lawyer,” he says. “You can absolutely set back your case by trying to do it yourself.”

Why you may need an attorney

Huge manholes await the unprepared. “For instance, if they send you back a refund on the premium, that means they’re trying to void the policy,” says Spain.

Also, cases involving employer-based life insurance policies that fall under the Employee Retirement Income Security Act of 1974, or ERISA, come with a 60-day appeal period that can easily expire without an attorney’s help.

Spain routinely reviews claims cases and offers legal advice for free.

And while he boasts that his success rate at trial is close to 100%, that’s not his 1st choice.

“I’ve resolved many cases simply by putting together the right records, the right arguments, the right case law and a letter explaining the position to the insurer,” he says. “Of course, then they know you’re serious, too.”

Beware 2-year ‘contestability window’

Despite what films like “The Rainmaker” may lead us to believe, Spain says bad faith or fraud on the part of the insurer are exceedingly rare.

Most often, his cases come down to deaths that occur during the 2-year “contestability window” when insurers can contest a claim based on misrepresentations or omissions by the insured, or a failure of the insured and/or the heirs to understand the nature and complexities of the application and coverage.

“What I see is overly complex applications for life insurance and overly detailed policies with exclusions that are calculated to benefit the insurance company that will be overlooked by most consumers,” he says. “I’ve seen people who were absolutely convinced that they had life insurance that would pay off the house, when what they had was an accidental death policy.”

 

You’re a millennial with no kids? Here’s why you should consider life insurance

Smiling young couple standing together outside

If you’re young and single, you may think that the things you want out of life are attainable with persistence and planning, and that you have lots of time.

But the reality is, you just never know about that last part.

This is why you might want to put life insurance — a financial product often overlooked by young adults — on your radar.

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Don’t dismiss it

Fewer than 20% of millennials say they’re likely to buy life insurance, according to LIMRA, an insurance research and consulting firm. 60% say Internet, cable and cellphone bills are higher priorities, while about 3 out of 10 millennials say saving for a vacation is more important than buying life insurance, a LIMRA survey found.

“There’s a feeling like, ‘I’m young, the odds are slim,'” says Tony Steuer, an insurance literacy advocate and author of “Questions and Answers on Life Insurance.”

“Part of it is they may not have experienced any of their peers dying,” he says.

But just because you’re a young, healthy single with no children doesn’t mean you should disregard the need for life insurance coverage.

“If there’s anyone who sort of depends on the income of a (millennial), the (millennial) should be thinking, ‘What would happen (to that person) if something happens to me?'” says Nilufer Ahmed, a senior research director at LIMRA.

Why you may need (more) life insurance

If you offer some financial support to your parents or other relatives, or if you fall into the majority of young adults with sizable student loan debt, you ought to think about life insurance. Keep in mind, for example, that if someone has co-signed on a loan for you, the obligation could fall on your co-signer to pay off your debt if you are no longer around.

Chances are you already have some life insurance — group coverage — if you’re working full time, Ahmed says. “The question comes up, ‘Do I need to go out and buy (more coverage)?'” she says.

To answer that question, you must calculate how much your family would need if you were suddenly out of the picture, says David Marlett, a professor in the department of finance, banking and insurance at Appalachian State University in Boone, North Carolina.

Assessing your coverage needs

Marlett says you must consider:

  • How much money your family would need to cover funeral expenses if you were to die unexpectedly.
  • How much would be needed to replace any income that you’re contributing to your family.

“When dealing with the loss of a loved one, the emotional side is a big enough struggle,” Marlett says. “If you can take the financial struggle off the table, that makes it much easier for the surviving family members to focus on just the emotional side.”

Term life insurance may be the best option for a 20-something on a budget, he says. It covers you for a determined time period, such as 20 or 30 years, and is relatively low-cost.

“You can get a lot of coverage from an excellent insurance company for very little money,” he says, adding that a healthy 25-year-old could buy $1 million in term coverage for under $40 per month.

Term vs. perm

Another option is permanent life insurance, which costs more than term but covers your entire life.

Corey Fick began shopping for life insurance once he and his wife started earning enough money to put aside some savings after paying the monthly bills.

“I knew that I wanted to get it as soon as possible so that she would be covered, while also locking in a low premium due to my perfect health,” says Fick, founder of the personal finance blog 20’s Finances.

He went against the grain and bought a permanent policy.

“Since I was looking at life insurance in my early 20s, I did not like the idea of paying for a life insurance policy for 20 to 30 years and then losing all of the benefits at the end of the term,” Fick says.

He adds: “While I wanted to prepare for the worst, I am planning to live well past my 50s.”

Do your homework

Life insurance can be hard to understand, warns Ahmed. “Usually, it’s a lack of knowledge that prevents (young adults) from being more secure in their financial situation.”

So, read up — like you’re doing now. And be sure the insurance company you select is financially solid, Marlett says.

“This is probably going to be a 20-year relationship,” he says, recommending that you check rating services such as Moody’s and A.M. Best. “Go with a highly rated company.”

Most of all, keep it simple. “Focus on the need to replace that lost income,” Marlett says. “There are a lot of complicated products out there.”

Understanding your home insurance policy

Home insurance policies are long, complicated and written in legalese. But it can really pay to know what’s in yours and how it works.

“Insurance is a complex product and there’s no harm and no shame in not fully understanding it,” says Alessandro Iuppa, former president of the National Association of Insurance Commissioners. “Most people don’t read a policy until they’ve had a claim denied, and that’s too late.”

Finding an insurer

Get recommendations from friends, relatives, co-workers or other people you trust. Be sure to check out the companies.

If your state keeps information, complaints or complaint ratios, weigh that too. You can find information about how to contact your state insurance office at www.naic.org. Make sure the company is on strong financial ground so it will be there if you have to file a claim. Check its ranking with A.M. Best Company.

Your dwelling

You want to be sure that if you had a total loss of your home tomorrow, your homeowners insurance policy would pay enough to build the exact same house in the same spot.

Don’t just focus on what you paid for the home. You want enough insurance to replace it, right down to that funky wallpaper.

“It’s common sense, but it’s not what people think about,” says Tena B. Crews, associate director of technology pedagogy at the University of South Carolina and author of “Fundamentals of Insurance.”

You also want to consider how home values and construction costs in your area would affect you if you needed to rebuild.

“If you’re living in a community or area where values have been skyrocketing, you want to be sure you have a replacement policy that will provide sufficient resources to rebuild,” says Iuppa.

If you’ve made any renovations, talk to your agent. Find out what he or she needs to document the changes and the value you’ve added to your home.

Replacement value

After a loss, if you want the insurance company to reimburse you for the cost of a new version of your possessions, then you want replacement value insurance for your belongings. In other words, the company pays you to replace what was lost.

But you might have to request it because not all policies have replacement value as the default coverage. Beware of policies that promise “fair market” or “cash value.” That means the company will give you the current value of the item, which will include wear and tear and depreciation. It also can make more work for you during a claim, since you have to substantiate not only the fact that you owned the article, but also what it was worth when you lost it.

It also pays to ask how your company handles claims with replacement value insurance. Some firms want you to purchase the new item and show a receipt before reimbursement. If that’s the case, how much time do you have? (If you’re living in a motel room while you rebuild the house, you may not want to replace the giant entertainment system right away.) And if you decide not to replace the item at all (you never really liked Aunt Minnie’s green frog vase), how will the company reimburse you?

Just the facts on life insurance

When buying insurance, you can be overwhelmed by an information avalanche. To protect your future from poor choices today, organize your insurance search by reaching back to grade school and employing the use of the 5 W’s: Who? What? Where? When? Why? and How much?

Who?

The classic argument to avoid life insurance runs, “If I die, why do I need money?” You don’t — but your family, your business or your favorite charity might. So anyone with dependents, human or otherwise, might need life insurance.

Of course, if you don’t need to protect anyone else, insurance is not a wise way to spend money.

According to Steve Kramer, who has served on the members’ insurance and benefits committee of the California Society of Certified Public Accountants for 27 years, this group not needing insurance includes people who have raised and educated children now living independently, folks who have accumulated sufficient assets to support a surviving spouse and the single elderly (and not-so-elderly) population.

What?

People approach life insurance with predisposed notions, says Rory Roniger, CLU, ChFC, head of the financial services arm of the Eustis Insurance Group in Metairie, La.

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“They might be oriented to term insurance, yet don’t have a good argument as to why,” he says.

“Any kind of insurance is a contract with requirements on both sides,” says Dave Evans, CFP. “Unfortunately, too many people think life insurance is a commodity, like going to the grocery store and picking up a piece of fruit to judge.”

“Term” insurance forms the base of every life insurance policy. Think of it as renting a safety net: The owner pays a fixed premium toward a concrete payoff over a specific time. If you die during this period, the insurance company pays the promised amount. When the policy reaches its deadline, the coverage vanishes.

Lawrence Wentz, who owns the Kindt, Kaye and Wentz agency near Philadelphia, says that contracts aren’t that cut and dry. Many companies sell term policies that guarantee a rate for only 10 years of the protection. A few providers guarantee just a year at the starter rate.

After the secured period ends, the company can charge one of several rates filed with the state insurance commissions.

Speaking of rates, start by assuming the initial quoted rate for your age and life circumstances is too low.

“I’ve placed people of all age ranges, and not many get this thoroughbred rate after the physical exam and application submission,” Wentz says.

The good news: Changing health status during your term limits doesn’t affect premiums or payoff. The rub comes when that contract ends. Many companies allow you to buy another policy, but at higher rates to balance your changed health status.

Some insurers offer convertible policies that allow a return client to take out another policy at the rate of a healthy person, but you pay a higher premium for the privilege.

Insurance companies also offer three variations of permanent life insurance — that is, insurance that covers you for your entire life.

Whole life offers term insurance’s set payoff for a set premium, except this policy doesn’t come with an ending date. You’ll pay the premium for the rest of your life, unless you decide to cash in and receive the cash value as a lump sum.

According to the Life and Health Insurance Foundation for Education, “the cash value of a policy is different from the policy’s face amount. The face amount is the money that will be paid at death or policy maturity. Cash value is the amount available if you surrender a policy before its maturity or your death.”

Permanent insurance

Permanent insurance
Insurance companies also offer permanent insurance, policies that cover you for life and provide a tax-deferred savings opportunity, provided you continue to pay the premiums. Three prominent variations of permanent insurance are whole life, universal life and variable life.

With permanent insurance there’s an investment component to build cash value in addition to the death benefit. A policy’s face amount is the money that will be paid at death or at policy maturity — most permanent polices mature around age 100. Cash value is the amount available if you die or surrender a policy before its maturity, according to the Life and Health Insurance Foundation for Education, or LIFE.
Term vs. permanent insurance
Term insurance Permanent insurance

Coverage over set period
No savings benefits
Fixed premium over term
Outlive policy or policy cancellation
Results in no money back
Death benefit paid to beneficiaries

Coverage for life
Tax-deferred savings benefit if premiums are paid
3 variations of permanent insurance: whole life, universal life and variable life include investment component

The cash value grows tax-deferred until you withdraw it. You can borrow against the cash value for any purpose, but you’ll have to repay it or your beneficiaries will receive reduced benefits. But building cash value means higher premiums, so these polices are much more expensive than term insurance.

Whole life, according to LIFE, provides you with a guaranteed death benefit and a guaranteed rate of return on your cash values. You pay a set premium that is guaranteed to never increase.

With universal life, the insurer separates the death benefit from the investment portion of the premiums, putting your investment dollars into its choice of bonds, mortgages and money markets. Then your investment fund pays for the cost of the set death benefit. No matter how poorly your investments do, you are guaranteed a minimum death benefit. If the investments do well, your heirs receive more money.

The death benefit and the cash value in a variable policy vary with the performance of the underlying investments, says LIFE. With variable life you’re shifting risk from the insurance company to yourself because you’re trying to achieve greater returns.

Permanent life policies can be complex. Don’t buy such a policy if you don’t understand it. If the seller explains it to your satisfaction and it meets your needs, then by all means get permanent life insurance.

Many experts say that, generally, these policies should not be used as savings vehicles for a child’s college education or for retirement. Better options would be a 529 plan, prepaid tuition plan, the federal Coverdell plan, a 401(k) or an IRA where you’re not paying an insurance premium.

A permanent life insurance policy might be good if you have a disabled dependent who will need long-term care. In that case, you might want to insure yourself for your entire life, as opposed to a typical situation where parents stop insurance coverage when their children finish college.