One of the least understood aspects of a life insurance policy is the death claim process. Many times we hear clients tell us that a neighbor or a relative passed away, and that a life insurance company took forever to pay them, or worse yet, the beneficiary only received the premiums paid plus interest. How can this possibly be true?
In this article, I’m going to attempt to clarify, and explain how the death claim process works when someone passes away, whether the client is insured with a life insurance or a final expense insurance policy.
What is a policy contestability?
A life insurance company has established this provision in the life insurance contract to prevent fraud. This makes the policy contestable in the first two years that it is in force, which means that if the insured dies within this time period, the insurance company has the right to contest the death claim, and do an investigation before it pays the cash benefit. If the death claim is denied, the beneficiary will receive the premiums paid only.
What are the requirements to process a contestable policy?
First and foremost, the insurance company will require medical records, and the death certificate, in order to process a death claim. Once these documents are received, the Insurance company will review them carefully, and determine if the deceased did not have an uninsurable medical condition prior to the date of application.
As an insurance agent of 15 years, I have encountered clients who have attempted to commit fraud by lying to me and the insurance company. Although this is very rare, the insurance company prefers to avoid this from happening. When I talk to my clients, I always emphasize the need to disclose all the information related to their medical history, and we need to answer all these questions on the application truly and correctly to avoid any future death claim delay or negation. The good news is that most contestable cases are usually paid within 2 weeks, once all requirement documents have been received. Additionally, The life insurance company will pay interest on your death benefit while the case is resolved.
What about contestability in a graded policy?
A Life insurance policy is defined as “Graded” when it has been approved and issued with benefit limitations in the first two years it is in force.
Depending on the insurance company, some graded policies pay a percentage of the death benefit in the first and second year, and then it pays 100% of the death benefit in year 3. Some other graded policies, like guaranteed whole life insurance plans, only pay the premiums you pay plus interest in the first two years (Interest varies by carrier, and state), and then after 2 years, it pays the full death benefit.
Since all limitations and exclusions have been declared on the policy contract, graded policies are not subject to contestability, and it will pay the stipulated cash benefit when the death certificate is received and claim is processed.
What happens after 2 years of paying the premium?
Please note that once a policy is in force for 2 years, the insurance company will usually process the death claim quickly, many times without that the need of a death certificate, like it is in the case of the final expense insurance policy from mutual Omaha life insurance. The payment can be disbursed in usually two ways: Policy assignment, o direct payment to beneficiary
- Policy Assignment
To a funeral Home
Most insurance policies are assignable to any Funeral home in the country, so even if the company may take two to three weeks to pay the benefit, the policy can be used as a guarantee with the funeral home. This is done by the beneficiary signing an assignment form where the beneficiary declares and authorizes a portion of the life insurance policy for the amount of the funeral services owed to the funeral home.
This guarantees the funeral service will be done quickly, without delay. The funeral home doesn’t mind waiting a few days for the insurance company to pay their services, since they already have a guarantee on that payment by using an assignment process. Also, funeral homes may use an independent finance company which specializes in policy verification and assignments. However, the assignment and processing fees maybe higher trough this method.
What about the cemetery?
For the most part, the cemeteries do not allow policy assignments to be used to pay for cemetery services. However, cemetery brokers or resellers often do. I have had a very good experience when assigning policies to guarantee a burial plot for my clients, many times at a lower price in the cemetery salesman. For the most part, the assignment process is very much very similar to the funeral service assignment process and there’s also a fee charged by the finance company.
All these facts are true whether you have a $300,000 term life insurance universal life insurance or final expense life insurance policy, all of them can be used to pay for funeral and cemetery services by using an assignment process. I have done it many times.
- Payment Directly to beneficiary
Depending on the life insurance company, a death benefit is usually paid to the beneficiary, once the policy, death claim form, and death certificate have been received and processed. This process may take 7- 14 business days. However, there are a few exceptions to this rule. Some insurance companies are able to pay the death benefit within 48 hours or less, without a death certificate! I have personally had the best experience with Mutual of Omaha and Lincoln heritage life insurance company.
Conclusion
Life insurance contestability refers to the period of time during which an insurance company can investigate the validity of a death claim and potentially deny the cash benefit to the beneficiaries if the case has been found to be fraudulent. This only applies in the first two years the policy is active. To avoid problems, policyholders should always be truthful and honest when filling out their life insurance applications. It is also important for policyholders to understand the terms of their policy, including the contestability period, so that they are aware of the potential consequences of making a misrepresentation.