Making Sure Your Family Gets Paid
You bought life insurance with the understanding that if you died your family would be protected. How do you make sure those financial benefits will be there for them? Understand your contract.
All life insurance policies have an “incontestability period” – a time limit (usually two years) during which the life insurance company has the right to dispute a policy’s validity based on information provided incorrectly on the application. Even though an inspection report is obtained, and in some cases a medical examination is performed, the company relies a great deal on the answers given on the application when deciding whether or not to issue a policy. It is important to remember that if an applicant fails to disclose information that would cause a policy not to be issued or to be differently rated, the policy may be withdrawn or a claim may be denied within this period.
With the policy in force after the incontestability period ends, the insurance company no longer has the right to deny claims or rescind the contract even if a misstatement in the application is discovered. The policy owner will receive all the benefits as stated in the contract – claims will be paid and the policy cannot be withdrawn. This provision, however, does not apply in cases of fraud.
An example of this might be an applicant who is diabetic if this question is answered "no" when it should be answered yes a policy claim would likely be denied. The reason being applicants who apply for life insurance and are diabetic are generally rated i.e. pay a higher premium for the extra risk or declined. By mis-stating the answer to this question the insurance company was not given the proper information to assess the risk of the insured. They would have issued a policy with a given premium that they would not have normally issued if they had the proper information
Life insurance contracts also have a suicide clause, which specifies that the proceeds of the policy will not be paid if the insured takes his or her own life within a specified period of time (usually two years) after the policy is issued.
Many people don’t realize that if they replace an existing life insurance policy with a new policy, they will be subject to a new incontestability and suicide period.
Another detail to examine when reviewing your life insurance contract is policy exclusions – an “exclusion” is a statement in a policy which describes a condition or type of loss that is not covered by the policy. A common exclusion is an exception for accidental death caused by an “act of war” or death “while in active military service.” Applicants who participate in hazardous activities such as skydiving or acrobatic flying may also have death exclusions in their policy as a result of these high-risk activities. Another exclusion to be aware of is a limitation on the policy payout if the insured is injured or dies in a restricted country. Many insurance companies will either add a surplus premium or an exclusion clause for frequent visits to what they deem to be a high-risk region. It is crucial that the policy-holder is made aware of these details by his broker, and understands the potential implications.
The application wording can vary from company to company, and this can have a direct impact on any exclusions inserted in the resulting policy. As an example, Company A asks whether “the insured has or plans to travel outside of North America in the next 12 months,” while Company B asks whether “the insured has or plans to travel outside of North America in the next 36 months.” This slight difference may result in Company B adding a travel exclusion clause to its policy, while Company A’s policy will not have one.
Buying life insurance is a prudent and selfless decision, but be sure that you fully understand the contract – its terms, conditions, limitations and exclusions – before you sign on the bottom line. Any ambiguities should be cleared up to your satisfaction by your adviser, and noted in writing.