Can a Company Refuse to Pay a life insurance Claim?

Except for certain circumstances, life insurance companies must pay the death benefits when a claim is filed. Those circumstances, in a majority of cases, fall into one of two categories: fraud or exclusions written into the policy. Exclusions are part of the contract and can be referred to as needed to understand the circumstances under which the company does not have to pay, but fraud is more difficult to explain, and actually depends on being caught during a specific time period or the company is still obligated to pay the death benefits.

Exclusions can actually be negotiated into the policy in order to reduce the premiums. For example, the policy might state that the policy is void if the insured person dies while operating a boat or motorcycle. As long as the person is not operating either of these types of vehicle when they perish, the policy would be valid and must be paid. Other exclusions might be part of a standard policy from the underwriting company, such as excluding suicide, meaning that the company does not have to honor the policy if the deceased killed themselves. Exclusions cannot be implied or hidden, so the policy must directly note the exclusions, and reviewing the policy will likely explain what those exclusions are.

Fraud or misrepresentation is a much broader area, but there are conditions which must be met in order for this method to result in a denied death claim. If the policyholder knew they suffered from a terminal illness but did not disclose that knowledge to the insurance company, as an example, then they committed fraud and the policy is subject to cancellation. The problem, though, is that the misrepresentation must be discovered within a well-defined period of time, called the contestability period. This time limit is listed in the policy, and if the fraud is discovered after that time has elapsed, the insurance company is required by law to honor the death benefits claim. For example, if the deceased suffered from a degenerative disease but did not tell the insurance company, and the contestability period is 2 years, then the insurance company must discover the illness before two years passes, or they lose the right to deny the claim.

Some policies may contain wording that extends the contestability period or completely eliminates it for some illnesses, but these fall under the category of exceptions and must be written into the policy. This means that unless the policy states that the insurance company can cancel the policy for certain things indefinitely, the company only has the period of time equal to the contestability period or they must pay the claim.