Protecting Your Life Insurance Policy

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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.

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"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.

"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.

Next: Where the burden of proof lies...