How Does a Claim Provision Work for Life Insurance?
One important aspect of a life insurance policy is how a claim provision works. What are claim provisions and how are they applied to beneficiaries upon the insured’s death?
Every life insurance policy has a claim provision within the policy that sets forth the procedures for filing a claim. It usually describes how long you have to file a benefit claim, including deadlines for submitting, notice of the claim, and a death certificate.
A life insurance policy is a contract between the insurer (the insurance company) and the policyholder. Within this contract is a clause that sets forth the steps and procedures for submitting and administering a death benefit claim.
To help expedite the claim process, call the agent who sold the policy to the insured.
Life insurance claims have three possible outcomes. In most cases, the death benefit will likely be paid in full to the designated beneficiary.
The second outcome, if other factors are involved, is the claim may be denied in its entirety. The third possible outcome is the insurer negotiates an amount less than the full amount of the policy. When a claim is not paid in full, it is referred to as either a denied or a resisted claim.1
Six reasons why a claim may be denied or resisted:2
- The contract never went into effect. The contract was not signed, or premium payments were not made.
- There was a material misrepresentation or some other form of fraud in the application process.
- The policy was not in force when the death occurred. In force means the policy is active and premiums are being paid regularly.
- An exclusion stated in the policy may apply to the claim. For example, many life insurance policies exclude death as a result of suicide that occurs during the first two years of the policy.
- The age or sex for the insured party on the insurance policy was misstated, possibly resulting in a lower or higher death benefit.
- The beneficiary designation is imprecise or contested by other potential beneficiaries. (In this case, the claim is not resisted or denied, but it may take a judicial process to determine the rightful beneficiary.)
In most life insurance policies, once the policy has been purchased by the policyholder, there is a contestability period where the insurance company is given a period of time to contest the policy if the insured’s death occurs during this period.
The life insurance company has the right to investigate during the contestability period. If a material misrepresentation or fraud is discovered during the investigation, the insurance company will likely rescind the policy and refund the premiums instead of paying out a benefit.
The contestability clause was first used in the U.S. in 1861 and is now required in all states. The contestability period is usually two years, though some policies may contain a period of one year or less. 3
The limits for filing a claim
Some life insurance policies have no time limit to submit a claim for a death benefit. If there is a time limit, the life insurance policy will have specific language detailing the time period in the life insurance policy issued. After a beneficiary files a claim, the death benefit payout is usually processed within 14-60 days, unless there are questions on the claim. Delays can happen if there is incorrect information submitted in the claim. It also depends on the complexity of the insurance policy and whether the claim is filed during the contestable period.
Filing the claim
It is best if you file for the death benefit promptly. Start by obtaining several copies of the insured’s certificate of death, which is generally required in a death claim. To help expedite the process, call the agent who sold the policy to the insured. He or she may help you with filing the paperwork for the claim. If you don’t know the agent, call the insurance company or check their website for instructions.4
Be sure and fill out all documents the insurance company requires. Inaccurate or incomplete forms will delay the process.
Once the claim is submitted, you may have options for how the death benefit is distributed. This depends on the specific language in the life insurance policy. Typically, the benefit is distributed in a lump sum, but these options may be available:
- A predetermined schedule of payments
- A life income option – This is a guaranteed income for life
- Interest income – The company holds the amount and pays you interest
If you are the insured, your understanding of how a claim provision works and asking the right questions about your policy may help your beneficiaries receive the death benefit without any delays or challenges. Speak to a licensed life insurance agent for more information.