Getting Your Life Insurance Claim Paid (or Denied) Starts When You Apply for Insurance in the First Place
For most people, applying for life insurance occurs when they are young and healthy, and the prospect of death is a remote, abstract event that will hopefully occur far into the future. Even though death may occur years or decades into the future, it’s a common practice for insurance companies presented with a claim to pull up that application, dust it off, and look for any errors or omissions they can use to deny the claim. It’s important to know this at the outset and take the application process seriously; not only will it determine your rates and acceptance, but it could impact the success of a claim years down the road.
What to Know About Rescission
A policy cancellation for application errors is technically known as rescission. When an insurance company rescinds a policy, they refund whatever premiums have been paid, but they escape the obligation of paying any claim presented under the policy.
For the most part, rescission is limited by law to a two-year “contestability period” that starts when the policy is issued. After that point, the insurance company should not be able to rescind a policy even if it finds errors in the application. Additionally, even within the contestability period, the insurer cannot rescind a policy for minor mistakes. Instead, any errors must be “material” to count. Materiality is a legal point that might need to be litigated in court if the parties disagree over whether a mistake on the application is material.
Insurers might be able to deny a claim based on application errors outside the contestability period if they can prove fraud on the part of the applicant, such as intentionally hiding a serious medical condition or risky hobby. Proving actual fraud would likely take a contested legal proceeding in court where the assistance of a skilled litigator would be needed.
Even though an insurer might not be able to rescind a policy outside the contestability period, an error on the application could still affect a claim. For instance, if an applicant did not disclose their status as a current or former smoker and later died of a smoking-related illness, the insurer might retroactively change the premium rate to what it would have charged had it known the truth about the applicant and charge the difference to the death benefit, thereby reducing the amount paid to the policy’s beneficiaries.
While it’s important to put yourself in the best light when applying for insurance to get insured at the best rate, it’s important to be honest as well. Know that your answers go into a national database that any other insurance company will access when you apply for insurance to check your current application over any previous ones.
Steps in the Application Process
1. Research.
There is a lot to learn about life insurance, including the many different types – term life, whole life, variable life, universal life, variable-universal… You’ll need to understand your options to determine what you want. Next, you’ll need to decide how much coverage to purchase. Life insurance is meant to cover significant expenses such as funeral and burial, college, mortgage payments, or income replacement. Depending on your needs and stage in life, the amount you need to purchase can vary considerably.
With those facts in hand, it’s time to research companies and find a reputable insurer that can issue a policy with competitive rates. Be wary about going with the cheapest company that might not be around when they are needed. This is the golden age of online reviews, and there is plenty of information out there to guide you, although you may need to wade through quite a lot of reviews to sift out the valuable information you truly need to make an informed decision.
2. Application Questions
Expect the application for life insurance to be extensive and require detailed answers. They want to know all about you and the things that might make you a low or high risk, which determines whether they will accept you and also what category (standard, preferred, preferred plus…) to put you in which determines your rates. These questions include your present physical condition and history of illnesses or surgeries, your lifestyle, hobbies, employment, whether you drink, smoke, or take illicit drugs, what medications you are on, and whether you have been denied life insurance in the past.
The application will also ask about your family medical history, including any incidence of cancer, heart disease, stroke, diabetes, kidney disease, or other conditions that tend to run in the family and could be an indicator of your future health challenges. If conditions like these are present in your immediate family, the applications will want to know the family member’s age of onset of the condition, as well as their age of death, if applicable.
The application will additionally want to know about your income and how you will be paying insurance premiums, i.e., where that money is coming from, as well as how often you wish to be billed (monthly, quarterly, semi-annually, annually). You’ll select your beneficiary or beneficiaries at this time and note what percentage of the death benefit to assign to each beneficiary. You can also select secondary or contingent beneficiaries at this time, who would receive the benefit if the primary beneficiaries predeceased you.
3. Physical Exam
A physical examination is a fairly typical aspect of applying for life insurance. It’s possible to get life insurance without undergoing an exam or underwriting. You may see advertisements for simplified issue or guaranteed issue policies offering life insurance with no exam required. These policies generally cost more than those that require an exam and go through underwriting, but if you wish to avoid an exam, know that options are available.
The physical exam required by most insurers is not very extensive. A doctor or nurse will interview you, go over your health questions on the application, and take your vitals (temperature, blood pressure, pulse). They may take a blood or urine sample as well for lab work; some require a stress test such as a treadmill test or electrocardiogram. Many exams can be scheduled at your home or office and last under an hour.
4. Underwriting
Once all the previous steps have been completed, the insurance company will spend a month or two deciding whether to accept the applicant, what category to put them in, and what premium rates to charge.
Conclusion
Take the time to do your research before you apply for insurance. Once you do apply, be honest and complete with your answers. If an application is accepted and later rescinded based on application errors, beneficiaries may have grounds to dispute the rescission as improper or even a bad faith attempt to avoid paying a claim. Bad faith rescissions of life insurance policies expose the insurers to liability for damages including emotional pain and suffering as well as punitive damages.
