What Are Some Reasons Life Insurance Won’t Pay out?

Lying, lapsed payments and suicide can be reasons life insurance won’t pay out.

Written by Casey Bond / June 24, 2022

Quick Bites

  • One of the most common reasons that a life insurance policy won’t pay out is a lapse in payments.
  • Another reason may be the lack of a beneficiary.
  • Lying on your application can very well come back to bite your beneficiaries.

Life insurance can be a lifesaver for your loved ones when you die. But what if it doesn’t pay out? There are a few reasons why a life insurance policy won’t pay out.

All life insurance policies work a bit differently. However, the common feature they all share is that if you die while the policy is active, your beneficiaries will receive a payout (also known as the death benefit). That is, except in a few instances. There are some cases when a life insurance won’t pay out. Below is a closer look at why that might happen.

Inside this article

  1. The policy lapsed
  2. There was no beneficiary listed
  3. No insurable interest
  4. Death during contestability
  5. Lying when applying
  6. Engaging in risky activities
  7. And if it doesn't pay out...

The policy lapsed

One of the most common reasons for a life insurance policy not to pay out is because the policy isn’t valid anymore. This happens if the policyholder allowed it to lapse in coverage by missing premium payments.[1]

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How Much Life Insurance Do I Need?

One of the most important choices you’ll make when purchasing a life insurance policy is the death benefit amount. Here’s how to figure out what it should be.

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Missing just one payment probably won’t result in having coverage terminated. Most policies have a grace period. Also, some types of insurance that have a cash value component will automatically cover missed payments. But once that cash value is used up, the policy will lapse and the insured will lose their coverage. If they don’t reinstate the policy or take out a new one, the beneficiaries will never see a death benefit.

Try to be diligent about those payments to make sure your policy is always valid.

There was no beneficiary listed

Another reason a life insurance policy won’t pay out is if there is no one to pay out to.

“If you don't have any specified beneficiaries—or if you have and they predecease you—the death benefit payout becomes difficult,” says André Disselkamp, co-founder of Finsurancy, an insurance consultancy. “The death benefit is paid to your estate rather than to your family members in some cases.”[2]

What Is a Life Insurance Beneficiary?

What Is a Life Insurance Beneficiary?

Choosing the person or people who’ll collect on your policy if you die may seem like a no-brainer, but there are some considerations to keep in mind.

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This can also happen if there is a beneficiary listed, but not enough details to track them down. That’s why it’s important to include a beneficiary’s full name and Social Security number when adding them to a policy.

How Does Life Insurance Pay Out?

How Does Life Insurance Pay Out?

Life insurance pays out in a lump sum or in installments, usually within 30 days. There are, of course, exceptions.

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You don’t have insurable interest

Not just anyone can be the beneficiary of a life insurance policy. You need to be able to prove you have “insurable interest,” meaning you’d encounter financial hardship if the policy holder died.[3]

“The reason why many people buy life insurance is to make certain that in case of their death, their loved ones will have the means to meet their financial obligations such as house payments, car payments, and other costs of living expenses,” says Matt Miller, founder and chief executive officer of Embroker, a business insurance company. “If you have no such connections, an insurance company may refuse to allow you to be a beneficiary, thus, there would be no pay out upon the death of the named holder.”

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How Does Life Insurance Work?

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The policyholder died during the contestability period

Insurance companies want to protect themselves from fraud. So most life insurance policies have what’s known as a “contestability period.” That’s generally the first two years the policy is in place, or the two years following a policy being reinstated, says Zachary Barton, Certified Financial Planner and owner of Barton Financial Group LLC, an insurance agency.[4]

If the insured person dies during this period, the insurance company has the right to scrutinize the policy and ensure there was no foul play. If something is amiss, the company could reduce the death benefit payout or deny the claim altogether, Barton says.

For example, many policies include a clause that it won’t pay out if the policyholder dies by suicide during the contestibility period.

The policyholder lied on their application

This is a surefire way to not get a payout. If the insurer finds any dishonesty or omission at the time the application for life insurance was completed, they will likely dispute the death benefit claim. Just don’t lie.

They died while engaged in a risky activity

If the policyholder dies while participating in a dangerous activity, their insurance may not cover them.[5] If that’s the case, beneficiaries wouldn’t receive a death benefit.

“Risky activities are leisure pastimes that carry a higher risk of harm or death,” Disselkamp says.

Think: skydiving, race car driving, etc. He added that working as a logger, pilot, oil rig worker or miner are examples that may fall under the hazardous activities category as well.

“Depending on how dangerous the action is, your insurer may include an exclusion in your policy that prevents payouts if you die while participating in it,” Disselkamp says.

How Much Is Life Insurance?

How Much Is Life Insurance?

A whole host of factors determine what your premium will be for life insurance coverage.

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What should you do if it doesn’t pay out?

First, know that it’s pretty rare for a life insurance policy not to pay out. As of 2019, only about 0.5% of death benefit claims were in dispute.[6]

That said, it is possible. If a life insurance company denies your claim for a death benefit, your first step should be to ask for that denial in writing.

Next, file an appeal. This will require you to gather as much documentation as possible to prove that you are entitled to a payout. If you aren’t able to come to a resolution directly with the insurer, you can reach out to your state’s department of insurance for help.

Article Sources
  1. How lapses in life insurance policies hurt you.” MassMutual. “https://blog.massmutual.com/post/lapse-life-insurance
  2. “What is a beneficiary?” Insurance Information Institute. https://www.iii.org/article/what-beneficiary
  3. “What is insurable interest in life insurance?” Fidelity Life. https://fidelitylife.com/learn-and-plan/insights/what-is-an-insurable-interest-in-life-insurance
  4. “What Is a Life Insurance Contestability Period? What You Need To Know.” Vantis Life. https://www.vantislife.com/resources/featured-resources/life-insurance/what-life-insurance-contestability-period-what-you-need
  5. “What does life insurance cover?” Prudential. https://www.prudential.com/financial-education/what-does-life-insurance-cover
  6. “Why Do Life Insurance Claims Get Denied?” Forbes Advisor. ”https://www.forbes.com/advisor/life-insurance/reasons-for-claim-denial

About the Author

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Casey Bond

Casey Bond is an award-winning writer who has been covering personal finance for more than a decade. Her work has also appeared on Yahoo!, Money.com, Fortune, MSN, Business Insider, The Motley Fool, U.S. News & World Report, Forbes, TheStreet, and more. She is a Certified Personal Finance Counselor.

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