People often ask when a life insurance contract becomes effective when they might need to file a claim immediately. It is human nature to procrastinate or to resist paying for something you may not “use.”
After all, a life insurance winner buys the coverage today and dies tomorrow. This maximizes your bang for the buck. Clearly, this beats paying into a policy for years, letting it lapse, and then getting nothing back in the end.
However, an immediate claim works only if the policy does not have a waiting period, or the cause of death does not conflict with the period of contestability rules or other common exclusions for accidental death.
Life Insurance Coverage That Starts Immediately
Finding life insurance coverage that starts immediately is possible. However, the devil is in the details. Keep in mind, insurance companies design the policies to cover future unforeseen risks.
In this case, the unforeseen risk is the premature death of the insured person. Therefore, you should expect the companies to weed out applicants who expect to die very soon. You will find this with all three main types of coverage.
Coverage Effective Date
The life insurance coverage effective date is the day that the policy becomes a contract. This definition is important because other features rely on this start time. The anniversary date, period of contestability, conversion privileges, and optional riders count on the coverage effective date.
There may be several methods or rules used to establish the coverage effective date. Read your policy language carefully. Life insurance is a contract. Contract law requires signed authorization (signed application) and consideration (one month of premium). Below are three different scenarios:
- Premium collected with the application
- Begins on the application date if approved
- Premium paid after issuance
- Begins after the policy is delivered and accepted by the insured during his or her lifetime and continued insurability
- Purchases through employer payroll deduction
- Begins on the account’s coverage effective date
Of the three alternatives noted above, paying the premium at the time of application is the best method for getting your life insurance policy to start right away.
Without Waiting Period
Buying life insurance without a waiting period is also possible for people willing to answer questions and/or agree to a medical examination. In addition, applicants of any health status can obtain same day coverage with no waiting period for accidental death.
- Fully underwritten policies include health questions and medical exams. It takes longer to get the coverage approved, but there is no waiting period for death benefit claims once the contract becomes effective.
- Simplified issue policies feature non-medical questions, no medical exam, and no waiting period before death benefit claims become payable. However, the face amounts are modest.
- Guaranteed issue policies feature no health questions or a medical examination. However, the face amounts are very small and include a graded death benefit feature that lasts 2 years.
All three coverage types feature accidental death benefits without a waiting period. If you buy today and die in an accident tomorrow the company may have to honor the claim. However, expect an investigation.
Accidental Death Riders
Your life insurance policy may contain an accidental death rider that features an immediate benefit in many instances. A rider is an optional coverage that could increase the death benefit amount in the event the insured dies because of something other than a disease of the body, mental infirmity, or diagnostic medical or surgical treatment.
Check your policy for some of these common accidental death exclusions relating to the rider. Your company could cite one of these reasons for not paying a claim.
- Involvement in an armed conflict
- Participating in a criminal activity
- Use of any drugs, intoxicants (alcohol), or narcotics except medications prescribed by a doctor
- Engaging in specified high-risk activities or avocations
Life Insurance Period of Contestability
The life insurance period of contestability provides another set of reasons the company may deny a claim. The contestability period is the time during which the issuing company can contest a policy or deny a claim for three additional reasons.
- Suicide or intentional acts of self-harm
- Misrepresentation of fact on an application
- Homicide involving a beneficiary
The life insurance suicide contestability clause determines when your policy will begin to pay for intentional acts of self-harm. Each state has differing regulations regarding suicide exclusion periods. However, most states have a two-year limit. Check your contract language for details.
Many companies will refund the premiums paid without interest if the insured dies by suicide (whether sane or insane) within the stated contestability period. Expect the claims department to order the coroner’s report, medical records, and the police report before denying the claim.
Misrepresentation of Fact
Life insurance policies also contain a two-year contestability period (one year in some states) for misrepresentations of fact. Expect the company to perform an investigation if the beneficiaries file a claim during the contestability period.
The company will check to see if the insured gave incorrect information on the application. They may do one of two things if they find material misstatements.
- Reject the claim and refund the premiums if they determine they would not have issued the policy
- Adjust the death benefit payable if they determine that they would have charged a higher premium
This is why it is very important to answer all questions on the application truthfully. Dishonest answers can come back to bite your beneficiaries if you die shortly after the effective date. The company may compare the autopsy report to the application to flag common anomalies.
- Use of tobacco and cigarette smoking
- Treatment or conviction for use of alcohol or drugs
Life insurance contracts will often contain a homicide clause relating to accidental deaths. Expect the claims department to obtain a police report to verify that the beneficiary was not involved in the incident – either directly or indirectly. A report implicating the beneficiary is another reason to deny a claim.
The homicide clause protects both the issuing company and the insured. Nobody wants a situation where a beneficiary has an incentive to hasten another person’s demise.