Top Reasons for Life Insurance Claim Rejection

Life can take an unexpected turn at any moment and sometimes there is little we can do when faced with an emergency. But we can certainly take measures to cushion the impact of any unfortunate incident on our loved ones. With the sudden stoppage in regular earnings due to the unfortunate demise of the breadwinner, the dependent persons not only find it difficult to maintain their standard of living, but such a situation may also push them into poverty. This risk may be reduced by taking a life insurance cover adequate to compensate for the loss of future earnings.

However, sometimes an insurance company can refuse to pay the insurance cover to nominee. Here, we explore the reasons for such claim rejection and how to avoid it.

Top Seven Reasons for Life Insurance Claim Rejection

The purpose of covering the risk of untimely demise would only be served if the nominee(s) / financially dependent persons get the insurance claim money in case of the unfortunate death of the insured person. In case of rejection of the claim, the basic purpose of taking an insurance policy by paying premiums would be defeated.

So, while applying for a life insurance plan, a person must be aware of the reasons for getting a claim request rejected.

The following are the top reasons for claim rejections:

Non-Disclosure of Details or False Information

Under the doctrine of “Utmost Good Faith”, it’s the duty of both the insurer and the insured to voluntarily disclose all the material facts honestly. It will ensure that a person gets all the relevant information to choose a proper insurance plan and the insurer gets all the required details to underwrite a proposal properly. Any wilful concealment of material fact by a proposer (the applicant) would lead to the rejection of an insurance claim.

However, Section 45 of the Insurance Act 1938 prohibits insurance companies from rejecting life insurance claims on the grounds of non-disclosure of material facts if a claim arises after 3 years from the issuance of a policy and the premium is paid for 3 or more years.

To avoid any inconvenience for the nominee, however, a proposer shouldn’t hide any details while applying for insurance cover, even if such disclosures lead to additional payment premiums.

Lapse in Policy

An insurance policy may lapse if premiums are not paid on time. While endowment plans generally have higher time limits for revival, pure term insurance plans lapse relatively quickly. While claims are still admitted during the grace period (which is generally 15 days for monthly mode of premium payment and 30 days for other modes) of paying the premium after the due date and the sum insured amount is paid to the nominee after the deduction of the premium due, claims are rejected outrightly on lapsed policies.

So, policyholders should take utmost care to ensure timely payment of premiums to avoid the chances of any rejection of claims.

No Update About Nominee Details

Getting the insurance claim amount becomes difficult for the financially dependent unless his/her name is mentioned in the insurance policy as the nominee. In the absence of the name of a nominee, a financial dependent has to undergo a cumbersome process to claim the insurance money and may face objections from other relatives in getting a succession certificate.

The name of the nominee automatically gets cancelled if an insurance policy is pledged while getting a loan or for any other purpose. So, once the loan is repaid, the policyholder should remember to redo the nomination. Otherwise, the death claim made by the nominee may get rejected.

Undisclosed Medical Threats

The purpose of insurance is to cover uncertainties related to insurable risks. If a person is detected with a critical or life-threatening disease, his/her number of days of survival becomes more or less certain. So, if a person hides his/her medical test reports indicating the detection of a critical illness and applies for a life insurance cover, it leads to fraud and would make the insurance contract null and void, leading to the rejection of the death claim. Even hiding other illnesses, which may otherwise lead to the payment of an additional premium or loading or any exclusions other than outright rejection of the proposal, would also amount to the rejection of a death claim.

So, it’s better to disclose all the material facts at the time of application, rather than making a death claim questionable even after paying the insurance premium.

Policy Exclusions

Life insurance policies come with some exclusions – which may vary from insurer to insurer – where claims are not entertained if a death occurs due to any of such excluded reasons or circumstances.

Such exclusions may be genetic or pre-existing illnesses like mental illness, cancer, etc, or chronic illnesses, diabetes, etc.

Even subsequently acquired diseases like HIV AIDS may also lead to rejection of claims. Exclusions may also be based on lifestyle-related causes like smoking, alcoholism, drug abuse, etc.

Exclusions may be due to self-inflicted causes like drunk driving, suicide, etc.

Exclusions may also be due to high-risk activities like military jobs, adventure sports, etc.

Exclusions may be situational as well, like war, nuclear attack, and even widespread natural calamities like earthquakes, tsunamis, etc.

Hiding Other Insurance Policies

The aim of taking insurance is to compensate for the monetary losses and not to make gains. Although, it’s difficult to calculate the exact human life value of an individual, but some accepted calculations are used to determine an approximate loss of future income depending on the number of years of remaining working life, present earnings, prospect of future earnings, and appreciation in income level. 

So, depending on the prospect of future earnings, an individual up to 40 years of age is allowed to take an insurance cover up to 25 to 35 times his/her current earnings. With the increase in age (and decrease in the remaining earning life) and increase in the level of income, this multiple reduces. For example, between 40 and 50 years of age, a person may take an insurance cover of 20 to 25 times his/her current income, between 50 and 60 years of age, 10 to 20 times, and between 60 and 70 years of age, only 5 times his/her current income. To ensure that the total insurance cover doesn’t exceed the permissible limits, a proposer needs to reveal the amount of insurance cover he/she already has. Hiding the details of other policies at the time of applying for a new one may lead to the rejection of the claim – especially if the total insurance cover exceeds the permissible limit.

Delay in Filing Claim

Technically, there shouldn’t be any time limit for making a claim request. However, to ascertain the cause of death by collecting circumstantial evidence, insurance companies generally set a time limit – generally up to 30 days from the date of death, which may vary from insurer to insurer – especially in case of early death claim (within three years of taking a policy) and in case of accidental/unnatural death. An unjustified delay beyond the time limit may result in the rejection of a claim.

How to Avoid Life Insurance Claim Rejection?

Claim rejection may be avoided by complying with insurance norms. Apart from following the doctrine of utmost faith – i.e. not hiding any material facts – an applicant should read the terms and conditions carefully to find out exclusions, etc before applying for a policy.

However, by following the things that are under the control of an insured person, the chance of rejection may be reduced, like –

Revealing all the material facts: By revealing the pre-existing and subsequent conditions influencing the insurability of a person, rejection may be avoided.

Paying premiums on time: To avoid the lapse of a policy due to non-payment of premiums on time, the insured person should remember the due date of paying the premium and pay it without any delay.

Nomination: Claim rejection may be avoided by proper nomination / re-nomination.

Changing lifestyle: By staying healthy with a controlled lifestyle – avoiding smoking, alcohol, drug abuse, etc – chances of claim rejection may be reduced.

Staying safe: By avoiding risky things like adventure sports and other things mentioned in the list of exclusions, claim rejection may be avoided.

Conclusion

Life insurance is a great way of transferring risk to protect the financial dependents. But the aim should be to ensure that the dependents get the claim money in the unfortunate event of the death of the life assured. So, apart from paying premiums on time, one should act responsibly to eliminate the chance of claim rejection.