Articles Tagged with: life insurance information
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When can an insurance company cancel a life insurance policy?

When taking out a life insurance policy, the policyholder aims to provide an extra layer of financial security and peace of mind for his or her loved ones. However, since insurers are incentivized to minimize risk, they will frequently look for reasons to cancel customers’ policies. This can jeopardize the policyholder’s supposed financial security and force him or her to evaluate other alternatives. Misrepresentations during the contestability period, nonpayment of premiums, and termination of employment are three of the most common reasons for which insurance companies may decide to cancel your policy.

The Contestability Period

The contestability period is defined as the amount of time during which an insurance company can review and fact-check information on a life insurance application. It is two years from the effective date of the policy in most states, although some (e.g. Missouri) limit it to one year. The contestability period is usually used as a means for denying claims after the insured’s death, but it can also be used in order to investigate and cancel existing high-risk policies.

If the policyholder left out any information on his or her policy application, such as a previous illness, medical condition, or hospital visit, the insurer has the right to investigate statements on the application and cancel coverage if something was left off. Unless there is reason to believe the application was fraudulent, the insurer has little motivation to do this while the policyholder is still alive and likely to live past the two-year contestability period.

Termination of Coverage/Lapse

The most common situation in which an existing life insurance policy may be cancelled is through nonpayment of premiums, i.e. when you don’t make one or more of your monthly payments. Your coverage is unlikely to terminate if you send payment a few days late, as the vast majority of life insurance policies allow for a “grace period” of at least fifteen days. So long as the insurance company receives payment within the grace period, coverage will remain in place.

However, if the grace period expires, your coverage will lapse; in other words, your policy will be cancelled. In such a situation, you have to contact your life insurance company and meet specific conditions before reinstating your coverage. This often involves retroactively making up all missed premium payments.

Termination of Employment

Many people get their life insurance via so-called “group life insurance plans” through their employer. When you are no longer considered an active employee, your coverage will terminate along with your employment. This is often the case with workers who go on disability and are thus no longer considered “active.” Their coverage may terminate even though they are still technically employed.

In these situations, it may be prudent to request that your insurance provider convert your group policy to a privately owned, individual life insurance policy. This often requires paying high premiums and meeting certain provisions as determined by the company.

If your policy has been momentarily cancelled, you can always reinstate it or buy a new one. When the policyholder passes away before reinstating coverage, however, legal recourse may be the only option. If your loved one’s coverage was wrongfully terminated prior to his or her death, it’s best to contact an experienced life insurance lawyer to evaluate your case.

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Do you pay taxes on life insurance benefits?

Life insurance is typically taken out to provide a secure, guaranteed pool of funds for a loved one in the event of the policyholder’s death, often used to compensate for funeral expenses and loss of income. When the beneficiary files a claim, he or she might be emotionally distraught and in desperate need of income. The last thing they’re going to want to do is think about taxes. Fortunately, the death benefit from a life insurance policy is not taxable in the vast majority of cases. However, there are several possible exceptions to this rule:

Taxes on Accrued Interest

While many life insurance policies distribute death benefits in one lump sum, some distribute death benefits via a series of regular (most likely annual) installments to the beneficiary or beneficiaries. If the principal death benefit is $100,000, paid over 10 years at a rate of $10,000 per annum, the amount left with the life insurance company each year may accrue interest. In this case, the $100,000 principal would remain untaxed, but any growth from interest would be taxable.

The Estate Tax

Additionally, if the beneficiary is not locatable and/or deceased (see our article: What happens to the benefits for a life insurance policy when the beneficiary is deceased?), the death benefit will usually be added to the policyholder’s estate. In the rare event that the policyholder’s total estate value exceeds $5,430,000, the excess amount will be taxed. At the federal level, this tax will most likely be at a rate of 40%. For example, let’s say John named his wife Susan as beneficiary on his life insurance policy, but Susan passed away a year prior to John’s death. Now John is deceased, so the death benefit from his policy is added to his estate value. His estate (including the death benefit) is valued at $10 million, so he pays 40% of ($10,000,000-5,430,000), which results in a tax of $1,828,000. John’s relatives are left with an amount of $8,172,000.

Estates less than $5.43 million are not taxed by the federal government, but state-by-state estate taxes are highly variable. Some states may tax the benefit, any accrued interest, or some combination thereof. Reassuringly, most states do not tax the actual policy value.

These are unusual and highly specific circumstances, that do not affect the vast majority of life insurance payouts. However, just because your death benefit is safeguarded from federal taxes does not mean that it’s guaranteed. Life insurance companies will often find ways to delay or deny your claim, as they are financially motivated to hold onto your benefits. If you believe that your claim has been wrongfully denied, it’s in your best interest to contact an experienced life insurance lawyer.

 

 

 

 

NOTHING IN THIS POST SHOULD BE TAKEN AS LEGAL OR TAX ADVICE.  DO NOT RELY OR ACT ON THIS POST AS LEGAL OR TAX ADVICE. WE ARE NOT TAX LAWYERS.  IT IS INTENDED TO BE INFORMATIVE ONLY.  If you have further questions or would like legal advice, please feel free to contact The Boonswang Law Firm at (855) 865-4335.

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What is a spendthrift provision?

What is a Spendthrift Clause in a Life Insurance Policy?

Let’s start with defining a Spendthrift Trust Provision

A “spendthrift trust” is a form of trust meant to protect the heir of an estate from creditors. A trust is created when an individual puts money aside to be managed, invested, and distributed by a trustee.

Often, an asset management company (AMC) serves as trustee for a spendthrift trust. Trusts vary in the amount of discretion that they afford to the trustee. Some trusts specify that the trustee can distribute funds “as needed,” while others specify restricted uses or amounts at specific time intervals. In contrast to a typical trust, in which the trustee receives some level of discretion over when to use/withdraw funds, spendthrift trusts typically restrict distribution of the trust to regular installments. For instance, if the trust value were $2,000,000, the trust might be paid out over the course of 10 years through annual, $200,000 installments.

Consequently, creditors and debt collection agencies cannot come after the full value of the trust. If the beneficiary only has the latest $200,000 payment in his or her account, the creditor is unable to reach the other $1,800,000 of assets, as they still technically belong to the AMC/trust and are not at the discretion of the beneficiary/heir. Creditors can access the funds to the same extent that the beneficiary can.

DAPT States

Some states allow for the creation of “Domestic Asset Protection Trusts,” which are self-serving spendthrift trusts that protect the creator’s assets from creditors. These function in much the same manner as other spendthrift trusts, except that payments are made back to the original creator instead of a beneficiary. As of 2017, DAPT trusts are only permissible in sixteen states as the concept is still relatively new.

It is important to note that since life insurance payments go to a beneficiary after the policyholder’s death, the policyholder cannot access his or her own death benefit. Consequently, life insurance is not used as a form of DAPT.

Spendthrift Clause: What is a Spendthrift Provision in Life Insurance?

What is a spendthrift clause in life insurance? Life insurance policies are treated in much the same manner as trust funds; both function as assets accumulated over the course of the creator’s (or policyholder’s) life. Likewise, a “spendthrift provision” or spendthrift clause is a clause in a life insurance policy which safeguards the beneficiary’s death benefit from creditors.

In life insurance policies with spendthrift provisions, the death benefit assets technically belong to the insurance company, which acts as an AMC. Since the insurer (not the beneficiary) owns the total benefit, its cumulative value is not subject to the beneficiary’s outstanding debts. As with a spendthrift trust, spendthrift life insurance policies pay out benefits over a given period (e.g. five years) on a regular basis, as opposed to singular lump sum.

Life insurance companies profit from spendthrift provisions because they can access money for more time. If a life insurance company is wrongfully limiting or restricting your benefits, be sure to contact an experienced life insurance lawyer to evaluate your case.

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How long should it take for an insurance company to pay out on a life insurance claim?

If all goes well and all documentation is in order, insurance companies should pay out on claims promptly. In most cases, the time from which the death certificate and necessary documentation is filed to payment of the death benefit will take less than a month, possibly even under two weeks. However, if your claim is taking an exceptionally long time to be processed, it could be an early sign that you won’t get paid.

Delay of claims during the contestability period

The more claims a life insurance company can deny, the more profit they will make. Consequently, insurers may try to delay your claim, allowing them to investigate further into your policy and find a reason to deny your benefits. While it is possible that the company is simply backlogged or that a document was filed incorrectly, claims are frequently delayed as a prerequisite for denial.

This is especially likely during the contestability period, a specific period of time (two years in most states) during which an insurer can investigate and “contest” statements made on the original life insurance policy application. For instance, if the policyholder was diagnosed with heart disease yet answered “no” to a question on their life insurance application asking whether he or she had any cardiovascular conditions, the insurance company can revoke the policy and avoid paying the death benefit. In order to find these discrepancies, the company will conduct a full investigation of the deceased’s medical records and history, which will often take a significant amount of time. Thus, delay of claims during the contestability period means that the insurance company is looking for a reason to avoid paying you the benefit.

State-by-state regulations

Some states have so-called “prompt payment” laws with deadlines and conditions under which claims must be paid. For instance, Michigan’s insurance code dictates that if benefits are not paid within sixty days after the claimant provides proof of loss to the insurer, the insurer will have to pay extra interest. Many other states have similar policies to incentivize insurance companies to pay out quickly, but they are not always well-defined. Some state that payment must be made “promptly” and in a “timely” manner but offer no strict timeline or consequences for delayed payment.

Regardless, if your life insurance claim has been delayed, it helps to get the assistance of an experienced attorney to help move things along and be prepared in the event that your claim gets denied.

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What happens if someone dies shortly after getting life insurance?

In short, the beneficiaries’ claims are more likely to be denied.

A life insurance company is contractually obligated to pay the specified death benefit regardless of when the loved one dies, whether it is four months or forty years after the policy takes effect. While the purpose of a life insurance policy is to provide coverage in the event of a loved one’s unexpected death, if the insured dies within a year or two of obtaining or increasing their insurance policy, the company will look for reasons to avoid paying the claim. This is especially likely to happen if information on the initial application was inaccurate or if it looks like the insured may have committed suicide.

If your life insurance claim was denied, we may be able to help you. Call us for your free, no-obligation case evaluation.

Do life insurance companies check medical records after death?

Yes. The insurance company will look for undisclosed medical conditions and also investigate the facts the insured set forth in the application for life insurance. If they find any discrepancies, your claim for death benefits will be denied.

The Contestability Period

The contestability period is defined as the amount of time during which an insurance company can review and fact-check information on a life insurance application. If the insured dies during the contestability period, the company will do a full investigation of the individual’s medical records as well as all of the other information requested on the application.

If any medical information was left off the policy application, the insurance company will have grounds for denying a claim or reducing the death benefit. They are only obligated to pay out if all the information made on the policy application was completely accurate. If there were any misrepresentations or falsities, they will invalidate the policy and refund premiums instead of paying the full death benefit.

For this reason, generally, claims in which the insured passed away during the contestability period have a significantly higher chance of being denied than they would after the period expires. Although the length of the contestability period varies (e.g. Missouri is one year), it is two years in most states.

Although it may be frustrating to policy owners and beneficiaries, the contestability period makes sense from a legal perspective. Say you were diagnosed with a terminal illness and decide to take out a valuable life insurance policy so that your relatives can benefit upon your inevitable death a few months later; on the application, you fail to mention your diagnosis such that the insurance company has no idea of your actual condition.

Know that life insurance companies also use the contestability period to their advantage; if the application asked the applicant to state any diagnosis of an anxiety disorder in his or her lifetime and the insured failed to mention a childhood diagnosis of OCD, the beneficiary’s claim can still be denied even if the alleged misrepresentation has little to do with the insured’s cause of death.

The Suicide Clause in Life Insurance

It may seem morbid, but most life insurance policies contain a provision, or “suicide clause,” in which claims can be denied in the event of the policyholder’s suicide.

The suicide clause is meant to deter people from buying policies with the intention of committing suicide shortly afterwards, thereby leaving large sums of life insurance benefits for their family members. This clause generally applies during the aforementioned “contestability period,” so if the policyholder commits suicide more than two years after buying the policy, beneficiaries are still entitled to the death benefit.

It is important to note that AD&D policies never cover suicide, which by definition cannot be considered an “accident.”

If you or someone you know is struggling with thoughts of suicide, call the National Suicide Prevention Hotline at 1-800-273-8255 to access their national network of local crisis centers that provide free and confidential emotional support to people in suicidal crisis or emotional distress 24 hours a day, 7 days a week.

Was your life insurance claim denied because the insured died during the contestability period?

If a policyholder dies shortly after buying life insurance, the insurance company has more freedom to contest/deny the beneficiary’s claim. Consequently, it is all the more important to contact an experienced life insurance beneficiary lawyer if your claim has been unjustly delayed or denied. Call us if your claim has been denied because the insured died within the contestability period – we get our clients paid!

Quick Tips for Buying Life Insurance (video)

The terms of your policy could be life-altering for your loved ones.

Insurance is something of a mystery to many of us.  What are the different kinds of coverage out there?  How much coverage do you need?

This video gives a few good rules of thumb:

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