Do Life Insurance Policies Always Pay Out?

Life insurance provides financial protection for your loved ones in the event of your death. When you purchase a policy, you expect that the death benefit will be paid to your beneficiaries if you pass away during the coverage period.

But life insurance claims can sometimes be denied. So do policies always pay out when the insured dies?

The short answer is no – life insurance doesn’t always pay out. There are certain situations where an insurance company may refuse to pay the death benefit to your beneficiaries.

Let’s take a closer look at how life insurance payouts work, reasons a claim could be denied, and steps you can take to help ensure your policy pays out.

How Life Insurance Payouts Work

First, it helps to understand what happens when you pass away with a life insurance policy in place:

• Your beneficiaries file a claim, submitting documents like a certified death certificate to the insurance company.

• The insurer reviews the claim to confirm the policy was active at time of death. They check that premiums were paid to date.

• If approved, the insurance company issues payment of the death benefit to your listed beneficiaries. This is called the payout.

Payout methods include:

• Lump sum payment of the full death benefit.

• Retained asset account where proceeds earn interest until withdrawn.

• Scheduled income payouts over time.

Most life insurance payouts occur without issues. But denials do happen. Let’s look at the main reasons.

Top Reasons Life Insurance Claims Are Denied

According to data from Trustage Insurance, the most common reasons life insurance claims get denied are:

1. Lapsed Policy Due to Unpaid Premiums

If you stop paying premiums, your life insurance policy can lapse. This usually occurs after a 30-60 day grace period. Once lapsed, the policy is no longer active. Your beneficiaries will not receive payout if you die after coverage ends.

This accounted for over 50% of denied life insurance claims, per Trustage data. Avoid potential issues by ensuring premiums are paid on time. Set up autopay if it helps. Contact your insurer if struggling to pay.

2. Inaccurate or Misleading Information on Application

Life insurance applications ask for personal health and lifestyle details. Providing inaccurate or misleading information is grounds for a claim denial.

For example, failing to disclose tobacco use or downplaying the severity of a health condition could be viewed as misrepresentation by the insurer. Answer all questions truthfully.

3. Death By Suicide Within Contestability Period

Most life insurance policies have a suicide clause. This states that death by suicide within the first 1-2 years of the policy (the contestability period) is not covered. Beneficiaries would receive back only the premiums paid, not the full death benefit.

4. Death Resulting From Excluded Causes

Check your policy documents for any coverage exclusions. For example, death while committing a felony, from illegal drug use, or while racing motor vehicles may not be covered. Accidental death policies may exclude deaths from illness or natural causes.

5. Failure to Pay Premiums on Time

As we saw, a lapsed policy due to unpaid premiums is the leading cause of denied life insurance claims. It’s critical to pay premiums on time and keep policies active to ensure payout.

Steps to Help Your Policy Pay Out

While there are scenarios where life insurance won’t pay, you can take proactive steps to avoid issues:

• Read your policy: Understand what causes of death are excluded, such as suicide or dangerous hobbies. Also note any waiting periods.

• Pay premiums on time: Set up autopay or calendar reminders. Contact your insurer right away if unable to make a payment.

• Be truthful on application: Take time to provide complete and accurate information. Do not downplay any medical conditions or lifestyle factors.

• Review beneficiaries: Keep beneficiary designations up to date as life circumstances change. Avoid listing minor children or estates.

• Consider “guaranteed” policies: These simplified policies often guarantee coverage and cannot be denied for misrepresentations. Ask your agent.

• Appeal claim denial: If your beneficiaries feel a denial is unjustified, they can appeal or get legal assistance.

Average Life Insurance Payout Timeline

If approved, how long do beneficiaries wait for the payout? Timelines vary, but many insurers issue payment in 2-3 weeks. Larger policies or disputed deaths may take 4-6 weeks.

Here are factors affecting the life insurance payout timeline:

• Cause of death – Accidental deaths often pay faster than illnesses. Contested deaths take more time.

• Claim submission date – The payout clock starts when the insurer receives the claim.

• Insurer procedures – Each company has own claim review and payment processes.

• Policy length – Newer policies may face extra scrutiny and require longer reviews.

• State regulations – Some states limit how fast insurers must pay life insurance claims.

While payouts typically take 2-6 weeks, there’s no set timeline. Complex cases can take months. Beneficiaries should follow up if the payout takes longer than expected.

What to Do if Your Claim is Denied

If your life insurance claim gets denied, here are some next steps:

• Request the denial reason in writing – Ask for specifics on why the claim was rejected.

• Review the policy – Check for exclusions or violations that led to the denial.

• Dispute the denial – You can provide additional information and request an appeal.

• Contact state regulators – The department of insurance may help with claim disputes.

• Get legal assistance – An insurance lawyer can advise if grounds exist to contest the denial.

• Negotiate a settlement – Discuss with the insurer if a compromise payout amount is possible.

With an understanding of why policies may not pay, you can take proactive steps to help ensure life insurance proceeds reach your loved ones. Carefully choosing the policy and insurer is also key.

Choosing a Reliable Life Insurance Company

While most insurers honor commitments, you still want to select a financially stable carrier with a track record of paying claims. Look for:

• Longevity and reputation – Established insurers with 50+ years in business and positive customer feedback.

• High financial strength ratings – Companies rated “A” or higher for financial stability from agencies like A.M. Best.

• Low complaint ratios – Check the National Association of Insurance Commissioners (NAIC) for low policyholder complaint rates.

• Prompt payouts – Ask carriers for average policy payout times. Two weeks or less is ideal.

Life Insurance Payout Statistics

Some key statistics on life insurance payouts:

• Over 95% of life insurance claims are approved and paid out to beneficiaries. Denials are quite rare.

• The overall payout ratio is around 95% – for every $1 collected in premiums, insurers pay out ~$.95 in benefits.

• In 2021, the life insurance industry paid out $90.43 billion in death benefit claims.

• The average individual life payout was $174,000. Average group life payments were $19,000.

• Top claim denial reasons after lapsed premiums are application errors (6.5%) and policy exclusions (6.2%).

• Most insurers report life insurance claim processing times of 7-21 days after receiving documentation.

Key Takeaways

• Life insurance provides money for your beneficiaries when you pass away, but payouts can be denied in some cases.

• Reasons insurers may deny a claim include lapsed premiums, misleading application details, death by suicide in early years, and exclusions for certain causes of death.

• Pay premiums on time, be accurate on applications, and read policy fine print to help avoid issues.

• Choose an established insurer known for financial strength and responsiveness. This helps ensure they’ll pay if a claim is filed.

• While most policies pay claims in 2-6 weeks, delays may happen if death details are disputed.

• If your claim gets denied, request the exact reasons in writing. Consult legal help and consider filing an appeal if the denial seems unjustified.

The bottom line is that the vast majority of life insurance policies pay out as long as you uphold your end of the contract. Carefully choosing your insurer and proactively avoiding pitfalls can give both you and your loved ones peace of mind.