Common Nullifications of Life Insurance Payouts
A life insurance policy is a legal contract between you and an insurance company. It clearly describes each party's obligations, as well as the consequences if either does not fulfil those obligations. Your obligation is to regularly pay the policy's premium, and the insurance company's obligation is to pay your beneficiary when you die. However, the company can deny the payment of your death benefit under certain instances. Every life insurance contract describes a "contestability period" during which the insurance company may nullify or amend the amount of money paid to your family.
If your death occurs within the first two years after you purchase a life insurance policy (called the contestability period), the carrier may investigate to search for fraud. If it is determined that you lied on your application, or intentionally failed to disclose material information that would have otherwise affected your life insurance contract, your family will not receive the total death benefit. For example, if you state on a life insurance application that you are not an aeroplane pilot, then crash your plane into a mountain next year, you have committed fraud and your policy will not pay out. Similarly, if you state on a life insurance application that you are a non-smoker, then die within two years, the carrier will not pay your beneficiary if it is determined that you were indeed a smoker, regardless of whether smoking had a direct impact on your death.
The "suicide clause" that is commonly referred to on television is merely an aspect of the contestability period in your life insurance contract. If you commit suicide during the first two years after purchasing a life insurance policy, the carrier will not pay benefits to your family. This rule applies regardless of whether you were determined to be sane or insane at the time of suicide. However, after the two-year contestability period expires, suicide cannot be used as a reason to deny or nullify the life insurance payout.
Life insurance contracts contain a clause clearly stating that benefits will not be paid if you die while committing a felony. This is outside the realm of the contestability period, so this rule extends for the entire length of your coverage period. For example, if you get killed while robbing a bank, the life insurance company will not pay your death benefit.
Similar to the rule prohibiting a payout if you die while committing a crime, another life insurance contract clause states that benefits will not be paid if you die while incarcerated. If you purchase life insurance, then later get sent to prison and die while there, your beneficiary will not receive your payout, regardless of the manner in which your death occurred.
Misstatement of Age
If it is determined that you misstated your age on your policy application, or if the insurance company issued you a policy at a price for coverage that was intended for someone younger, the payout may be amended. The insurance contract states that in such an instance, the carrier is only required to give your family the benefit amount that you would have actually purchased with the premiums you paid. This clause is intended to protect the carrier from mistakes or administrative mix-ups, and is especially important in the case of multiple family members with the same name.