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Life Insurance Loopholes

Not all contracts on your life are the same – there’s the gangster movie variety which usually involves a guy named Vinny or Tony who sends you to sleep with the fishies and then there’s the life insurance type. Only the second one, however, has fine print and exclusions that can cost your beneficiaries big time.

Related: How Much Life Insurance Do I Need?

Insurance companies are like Vinny and Tony in that they like to turn a profit from the prospect of your demise, and like our fictional hit men, life insurance companies like to minimize their risk as well. Insurance companies do this by stacking the deck, so to speak, and limiting the number of claims they have to pay before a person reaches their full life expectancy.

That’s really not as complicated or nefarious as it sounds, but it can still be costly if you don’t understand the rules of the game. In the insurance business they are called exclusions and what is allowed is determined by each state’s insurance commissioner, although they are all pretty standard these days.

You Lie – You Lose

You’ve no doubt heard it said that honesty is the best policy. The law, along with insurance companies, takes this very seriously. This brings us to the first way your beneficiaries can be denied your life insurance payment. The law in all 50 states includes something called the contestable period. The contestable period pertains to the first two years of coverage.

Life Insurance Myths Exposed

During the contestable period the life insurance company can cancel your policy, including paying a claim upon your death, if, and it’s a BIG IF, they find you lied on the application. To be clear, in this case, all lies are created equal, so it does not matter if you lied about having high blood pressure and were killed by a falling asteroid. If you lied and the insurance company can prove it in the first two years they don’t have to pay.

Suicide Clause

Like the exclusion period, this exclusion is usually in place for the first 2 years and allows insurance companies not to pay out the death benefit for a suicide during this period. The most your beneficiaries will receive is a refund of the premiums paid until the time of your death.

Alcohol and Drug Use

Life Insurance Loopholes

This is one of those exclusions that may not be on every policy and can vary from company to company and state to state. In most forms, it states that a claim can be denied if death occurs while the insured is under the influence of illegal drugs or alcohol – even if death has nothing to do with the drug or alcohol use. This means if you are drunk when you are struck by a rogue asteroid, the insurance company can refuse to pay.

5 Factors That Could Pump Up Your Premium

Illegal Activity

There is not a lot of wiggle room with this exclusion which says that if the insured dies while engaged in an illegal activity, there will be no payout. This exclusion can apply to all illegal activities and all causes of death. For example, if you are out for a hike and decide to take a shortcut across private property (trespass), and are struck by a falling asteroid the life insurance company can refuse to pay your beneficiaries.

Dangerous Activity

Since “dangerous” can be a relative term, or at the very least subjective, insurance companies will usually list activities they consider dangerous. Examples include skydiving and auto racing; however, for an additional premium, life insurance companies will cover you during these activities.

Act of War

No longer a common exclusion, it’s not exclusively intended to exclude soldiers, but civilians such as journalists or tourists traveling to dangerous areas.

Aviation Exclusion

As a rule, when this exclusion is present it usually applies to private aircraft only and does not include commercial airlines.

Misstatement of Age Clause

Life Insurance Loopholes

Feel free to lie about your age to a perspective life partner (it won’t end well, but go ahead if it makes you happy). Tell that cute guy or girl in the bar you’re a Gemini instead of a Taurus if you really think it will help. But don’t do it on a life insurance application! Intentionally misstating your age, even by a month is enough to get you cancelled and a claim denied.

5 Mistakes to Avoid When Buying Life Insurance

Bottom Line

Call them loopholes, technicalities or fine print, exclusions on life insurance policies should never be ignored. Carefully read your insurance contract before signing. If you are uncertain, ask questions, and look up every once in a while to check for falling asteroids.

Photo Credit: ©iStock.com/DNY59, ©iStock.com/Instants, ©iStock.com/PointImages

Frank Addessi Born and raised in the center of the known universe, Brooklyn NY, and currently hiding out in the bucolic hills of northeast Pennsylvania writing about personal finance. His expertise includes personal loans, credit cards and retirement. It's not easy living the American Dream but someone has to do it!
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