If you own a life insurance policy, you may be fully aware of the situation regarding the pay out. It’s not just as simple as the policy paying out once you die – it can depend on the cause of death, among other factors.

To make sure your loved ones receive the financial support they need, it’s essential to understand how the process works. In this article, we will explore the most common reasons life insurance policies payout and why they can be denied.

How does a life insurance payout work?

Life insurance payouts are typically issued as a lump sum payment, allowing your loved ones to manage the funds according to their needs. Whether that be covering immediate expenses like funeral costs, paying off debts, or securing their financial future.

The payout process begins when a beneficiary submits a life insurance claim using a claim form, along with a death certificate. The claims process can differ depending on the type of life insurance, such as term life insurance or a joint life insurance policy.

The process typically involves several key steps:

1. Notification of death

After the policyholder’s passing, the designated beneficiary must notify the life insurance company to begin the claims process. The insurer will need some documentation, which usually includes the policy number, a certified copy of the death certificate, and proof of identity.

2. Review

Once the insurer has received the supporting documents, the company will begin their review process. They will examine the policy details, the provided documentation, and the circumstances of the death. This review period can take anywhere from a few days to several weeks, depending on the complexity of the claim.

3. Acceptance

Upon completing the review, the insurance company will determine whether the claim is valid and how much is to be paid out. If all goes smoothly and the policy is active without any exclusions,

However, if there are discrepancies, such as if the deceased withheld information regarding their health or engaged in dangerous behaviours, the insurer may investigate further. In such cases, they may request additional information or documentation which can delay the process.

What types of death are covered?

The cause of death can play a huge role in whether a claim is accepted or denied, as life insurance policies often contain exclusions for certain types of deaths.

Death due to natural causes or illness

A natural death is what we would describe as a death due to health-related issues or age-related factors, such as heart disease, cancer, or other medical conditions. In such cases, beneficiaries typically face fewer complications when filing a claim for a payout.

Most life insurance policies are clear about cover regarding natural causes of death. As long as the policy was in force at the time of death and the premiums were paid up to date, beneficiaries can expect the claim to be honoured swiftly.

Accidental deaths

Accidental deaths are a term used for unforeseen events that result in the death. Examples can include car accidents, falls, or drowning.

Most standard life insurance policies will pay out for accidental deaths. However, the insurer may choose to investigate the cause of death to confirm the deceased was not at fault.

For instance, if they were under the influence of drugs or alcohol at the time of the accident, the payout could be denied. Likewise, if the death resulted from risky activities, such as extreme sports or criminal acts, they can deny the claim.

Suicide

Life insurance policies often have specific clauses related to suicide. Typically, if the insured commits suicide within the first two years of the policy, the insurance company will not pay the death benefit.

This is known as the “suicide clause.” However, after this period, a life insurance payout is generally made, provided all conditions of the policy are met.

When you apply for cover you may be asked if you have a history of mental illness or if you’ve ever been hospitalised for mental health reasons. If you withhold such information the insurer could choose to deny your claim.

Death outside the policy term

Term life insurance covers you for a set amount of time as agreed upon when you purchase the policy. This could be anywhere between 5 – 50 years.

If you were to pass away after the policy term has expired, no payout will be provided, regardless of the circumstances of the death. This is where whole life insurance could be a better option as it has no expiry date.

Terminal illness

Many life insurance policies now cover terminal illness which allows the insured to access a portion of the death benefit once diagnosed.

By terminal – this means an illness in which you have 12 months or less in which to live. This option can relieve financial burdens during a difficult time by allowing access to funds for medical expenses or end-of-life care.

That doesn’t necessarily mean a payout will be made. If your insurer finds out you withheld information about your health during the application process, they may refuse to honour the claim.

It’s crucial to be completely transparent about your medical history and any existing conditions when applying for a policy.

Death due to illegal activity

If the death is related to illegal activities, such as drugs, robbery, or other criminal actions, insurers will not provide a payout.

Most life insurance policies contain a clause that explicitly states that if the insured’s death occurs while they were committing a crime or was the result of illegal acts, the beneficiary may not be entitled to a payout.

Another example is if the policyholder was murdered by a beneficiary, in which case they would be denied from receiving any benefits under the policy.

Unclaimed or delayed payouts

Unclaimed or delayed life insurance payouts can occur for several reasons. One common reason is a lack of awareness about the policy, either because beneficiaries are not informed or the insured person did not tell them about the life insurance policy.

Delays might also happen if the required documentation, such as the death certificate or information is missing or incomplete. Make sure your policy is up-to-date to prevent these issues.

When could a payout be denied?

A common reason claims are often denied is due to undisclosed information, such as medical history, which can void the policy. It can also occur if you fail to keep up with monthly premiums and can result in a lapsed policy.

As mentioned the payout can be denied if the cause of death falls under excluded circumstances stated in the policy agreement, such as suicide within the first two years of the policy. Or, if there is suspicion of fraud related to the claim, the companies may conduct an investigation, potentially leading to denial.

If you wish to learn more about the claims process, it’s best to speak to your insurer directly as they will be responsible for processing your claim.