- A life insurance policy is only in force for as long as you make the premium payments. If you have a life insurance policy with a cash value, the insurance company will withdraw those funds to keep the policy active. However, if you have a policy that does not have a cash value, such as a term life policy, the policy will cancel if you fail to make a payment. If you die before reinstating the policy, the insurance company will deny any claims made by your heirs.
- During the first two years a life insurance policy is in force, an insurance company may rescind the policy if it discovers the policyholder misrepresented information on the application. This two-year period is known as the contestability period. If a policyholder dies during the contestability period, insurance companies often order the policyholder's medical records to investigate the accuracy of the information on the application. The company can elect to rescind the policy if it discovers that the insured had an undisclosed condition that, had it been disclosed, would have caused the company to reject the application. The undisclosed condition does not have to have any relation to the policyholder's death. When an insurance company rescinds a policy, if refunds the paid premiums to the estate and denies the claim.
- Unlike policy rescissions that must occur within two years, the insurance company may deny a life at any time if it believes the insured submitted a fraudulent application. A common example of application fraud is when the policyholder purposefully hides a terminal illness. If the policyholder dies within the first two years, the insurance company will just rescind the policy. If it occurs after the contestability period, the insurance company will deny the claim if it proves the policyholder knew he was going to die sometime in the near future.
- Most life insurance policies contain coverage exclusions that may cause an insurance company to deny a claim. For instance, many policies exclude coverage for suicide during the first two years of the policy. Some policies deny coverage for deaths caused while the policyholder was committing a felony. Many low-cost life insurance policies exclude coverage for deaths that occur during the policyholder's participation in a risky activity, such as skydiving.
