FRIDAY, JUNE 14, 2013
You've got the best of intentions in providing for your loved ones after you're gone, but your actions could come back to haunt them in the form of a bumbled life insurance payout if you're not careful. Here we explain five mistakes to avoid so that your beneficiaries get what they're owed - no matter what type of life insurance policy you have.
1. Lying on your life insurance application
They say the truth hurts, but it can hurt even more if you lie when you fill in a life insurance application. While it may be tempting to deny that you're a smoker, or that you've been treated for a particular disease or medical condition, you could find your policy null and void.
Life insurance companies consider these factors when setting rates -- or determining whether to insure you at all.
If your life insurer finds out you lied, it's considered "material misrepresentation," and your application for life insurance will probably be denied, says Whit Cornman, spokesman for the American Council of Life Insurers (ACLI).
If the policy has already been issued, there's typically a two-year contestability period. If your insurer finds out during that time that you've lied, the policy may be canceled or you might face higher premiums, he says.
If the lie is particularly egregious, the insurer could deem it fraud, even after the two-year contestability period is up, and the policy could be rescinded, says Stephen Rothschild, chairman of the nonprofit LIFE Foundation.
2. Failing to make premium payments and letting your policy lapse
Just because you miss a payment doesn't mean your policy is dead in the water. Life insurance companies typically offer policyholders a 30-day grace period for payment, and some companies extend that to 60 days, Rothschild says. During that time your policy will still be in effect, Rothschild says.
Even after the grace period is up, you usually can get your term policy reinstated, but if the lapse has been lengthy you may need to undergo another medical examination, he says.
If you have a permanent life insurance policy, the insurer might use the cash value in the policy to cover the premiums and prevent a lapse in coverage, says Beth O'Brien, vice president of life product development at Genworth.
However, if your policy lapses and is not in force when you die, your beneficiaries are out of luck.
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