The high-profile deaths of actors Heath Ledger and David Carradine — both of which initially were thought to be suicides — have brought attention to a serious financial question: Can certain factors (such as suicide) invalidate a life insurance policy?

In some cases, the answer is yes. The trouble starts with a few words known as “an exclusion” that may be found in a life insurance contract. An exclusion is a circumstance — such as a particular cause of death or an allegation of fraud — that invalidates a claim.

How likely is it your heirs will end up in court fighting for the benefit you’re paying for now?

People who work in the industry insist it’s relatively rare for life insurance companies to fight death claims.

“If the applicant does what’s right, then the insurance company will do it. It’s not a bait and switch; it’s not something they’re trying to avoid,” says Rich Fuller, owner of Special Risk Services, an insurance agency in Littleton, Colo.

However, others are not so sure. For example, Joseph Belth, professor emeritus of insurance at Indiana University in Bloomington, says some insurance companies routinely resist paying claims that take place within the first two years after a policy is written.

“Many of (the claims they resist) are small policies and the people are not in the position to mount a real battle,” says Belth, who also edits The Insurance Forum.

“There’s really not enough money involved to interest a lawyer in getting into it, so (the beneficiaries) aren’t really in a position to fight it.”

2 big exclusions

Exclusions are not as prevalent as they used to be. In the past, many life insurance contracts contained exclusions for deaths due to acts of war, commissions of felony or even participation in riots.

Nowadays, some of these more oddball exclusions may still survive in group insurance, especially accidental death and dismemberment, or AD&D, insurance. However, the vast majority of life insurance policies include only two exclusions:

  • Death by suicide. This one is pretty straightforward and is intended to prevent suicidal people from taking out a big life insurance policy to ensure their heirs will get a million-dollar payday.
  • Material misrepresentation on your insurance application. This includes any intentional falsehoods or omitting key information that an insurance company would use to decide whether and at what cost to cover you.

In most states, these exclusions only apply for a limited time because of what’s known as an “incontestability clause,” says R. Marshall Jones, a life insurance consultant based in West Palm Beach, Fla.

“The burden is always on the insurance company to prove what they’re supposed to pay.”

“In general, the contract will say that the death claim cannot be denied because of a misstatement of fact after the contract has been in force for more than two years,” Jones says.

The only way an insurance company can contest the claim after that is if the company can prove intentional fraud, Jones says.

Unfortunately for Ledger’s family, the actor’s death occurred less than two years after his policy went into effect, and this exclusion and another related to his suspected suicide played a major role in the legal battle over a $10 million life insurance claim.

The insurance company in question, ReliaStar Life Insurance Co., alleged the star’s death from a drug overdose was in fact a suicide and that Ledger had misled the company about his history of drug use during the underwriting process.

Despite their allegations, ReliaStar eventually settled the case for an undisclosed amount in January 2009.

Uphill battle for insurers

The outcome of the Ledger case underscores an important point, says Ted Affleck, a Newington, Conn.-based independent consultant who provides expert witness services on litigation involving life insurance.

“The burden is always on the insurance company to prove what they’re supposed to pay and what they’re not supposed to pay,” Affleck says.

An insurance company must prove that the insured broke the rules of the policy in order to avoid paying a death benefit, and that’s not an easy thing to do, especially when it comes to something as hard to quantify as a person’s state of mind at the time of death.

Fuller remembers one case where a man broke up with his girlfriend and on the way home died after smashing his car into a bridge abutment at 100 mph.

“Was that suicide or a driving error? Probably suicide, but you can’t prove what was going through his mind in that last 3 feet before he hit the abutment, so we paid the claim,” Fuller says.

Insurance companies also bear the burden of proof on denials based on mistakes or omissions on life insurance forms, Jones says.

“There’s a strong public policy protecting the individual that basically says, because the insurance company wrote the contract and because the insured is now dead and cannot explain his answers or failure to answer, the public policy is to force the insurance company to pay the death benefit,” Jones says.

However Fuller, who previously worked in the claims department of insurance giant Prudential, contends that insurance companies often go the extra mile to do right by policy holders.

He cites the example of claims life insurers paid following the Sept. 11 attacks, even though the victims hadn’t paid a premium yet — the standard measure of when coverage begins.

“The insurance companies paid the claim because that was the intent and they went overboard to do what was right,” says Fuller.

Keeping your heirs out of court

What can you do now to keep your family out of court after you die?

Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute in New York, says the best way to ensure a payout after death is to completely and truthfully answer questions from your life insurance company.

For example, had Ledger informed the insurer about his history of drug use, his heirs might not have found themselves in court, Weisbart says.

“If (his drug use) had been fully disclosed and the company decided to write the policy anyway, then the issue would never have arisen,” Weisbart says.

On the other hand, don’t volunteer information unless the company specifically requests it. Unnecessarily revealing too much information could result in higher rates, Fuller says.

“What you want to do is treat it like an IRS audit,” Fuller says. “Answer the question exactly the way the question says. If it says, ‘Do you plan to be out of the country for more than four weeks,’ you really don’t want to tell them you’re going to Lebanon for three weeks. That’s not what the question is.”

Also, remember companies judge the truth of your statements according to your status at the time you made them. So, if after a few years your status changes and becomes more risky, there’s no need to run back and tell your insurance company.

“I could take out a policy today and never have any intention of getting in a shark cage and it would be an absolutely true and valid statement,” says Ed Hinerman, president of the Hinerman Group, an insurance agency based in Salida, Colo.

“But then my dear wife might buy me an adventure in a shark cage for my 60th birthday. Things like that pop up and life insurance companies don’t hold that against you.”

Still, if you do currently have significant risk factors in your background, don’t let fear corner you into giving incorrect or incomplete answers on insurance forms. Lifestyle or health issues don’t necessarily preclude you from qualifying for a life insurance policy, Weisbart says.

Today, insurers are more likely to price a risk into the policy than to reject you outright or to include a special exclusion because you disclosed risk factors like small-plane aviation, heart attack history or fondness for sky diving, he says.

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