An insurer promises to pay a designated beneficiary
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary sum of money (the "benefits") upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger payment. The policy holder typically pays a premium, either regularly or as a lump sum. Other expenses (such as funeral expenses) are also sometimes included in the premium.
Life policies are legal contracts
Life policies are legal contracts and the terms of the contract describe the limitations of the insured events. Specific exclusions are often written into the contract to limit the liability of the insurer; common examples are claims relating to suicide, fraud, war, riot and civil commotion.More often than not, life insurers make good on policies, paying $38 billion in death benefits on individual policies last year. But what happened to Sheila Weissberger was not unusual. The claims of thousands of beneficiaries are denied or disputed every year -- more than 5,000 last year alone -- many for allegedly flawed applications, a Times review found.
Assurance that life insurance benefits will be paid
Many States have provisions designed to offer some assurance that life insurance benefits will be paid, even if the insured may have made misstatements in the insurance application. The idea is to make sure that if an insurance company has any questions or problems, those matters are addressed while the insured is still living. It is not fair to allow an insurance company to collect premiums for years only to then conduct a more thorough investigation after death and decide not to pay the insurance beneficiaries. These types of provisions are usually called "incontestability clauses." Essentially, such clauses dictate that after a certain period of time, usually 2 years, an insurance company cannot contest a life insurance policy for ANY reason, even fraud.
The incontestability clause
Probably one of the most misunderstood parts of life insurance is the incontestability clause and what it really means. The question from clients is most often framed something like, "How long does the policy have to be in force before it pays?"
There are guaranteed issue policies that truly have a waiting period before they will pay a death benefit, usually 2 or 3 years, but that is different from the 2 year incontestability period in a traditional policy. The following attachment is the clause as it appears in most policies. It isn't unusual for a person to honestly not remember every detail of their health history or to accidentally leave some small detail out. While this may ruin most people's image of life insurance companies, they really aren't looking for a way not to pay claims. They are protected from material misrepresentation through the two year clause, but the remedy if they find some inconsistency is not always to void the contract and not pay the death benefit
Most states long ago banned limitless rescissions of insurance polocys
To stop abuses by insurers, most states long ago banned limitless rescissions, but in California and elsewhere, they are allowed during the two years immediately after a policy is signed. the insurance carrier had to pay out.
Beware of NEW Two Year Contestability Period: If you let your policy lapse and reinstate it, or in some cases when you make a policy amendment, your two year contestability period might start over again from that date. Please take this into consideration when you make any life insurance policy changes, or when replacing an old policy for a new one.
Experts and consumer advocates say some insurers have turned that into a "gotcha period," seizing on flaws after claims are made that they could have looked for before issuing coverage.
Regulators need to come down hard
"Regulators need to come down hard on companies that are rushing applications through in order to gain premium income without taking time to screen the risks, then using rescission to control payouts and increase profits," said Amy Bach, an advisor to National Assn. of Insurance Commissioners and executive director of United Policyholders, a nonprofit consumer group. Industry representatives say the power to rescind policies and withhold benefits is essential and fair. Accurate information is "crucial to the agreement and to the actuarially sound pricing of the product,"
Death Master File
At issue is whether life insurers are using a federal list of Americans who die, the U.S. Social Security Administration's Death Master File, to determine prompt payment of life insurance benefits. Life insurers say that they pay billions in benefits every year and that they go to great lengths to find beneficiaries.Many states, including Connecticut, require life insurers to hand over unpaid life-insurance claims to a state account if the insurer is unable to find a beneficiary within a certain period of time. In Nevada, if a life insurer is not able to find a beneficiary three years after a policyholder dies, any funds related to the policy must be declared unclaimed property and transferred to the state treasurer's office.
Deceased life insurance policyholders
"For many years, MetLife selectively used the Social Security Administration's Death Master File database to cut off payments to annuity holders but did not use that database to identify deceased life insurance policyholders and pay their beneficiaries," said California Insurance Commissioner Dave Jones. "Under today's settlement, that practice will end. I hope other life insurers will follow MetLife's lead and enter into similar agreements."
Additional resources provided by the author
Howard Roitman, Esq.
8921 W. Sahara Ave.
Las Vegas, Nevada 89117