Why life insurers do – and don’t – pay claims

If you understand life insurance there’s less chance of your claim not being paid, writes Nigel Bowen.

Life insurance policyholders find it reassuring knowing their loved ones will be looked after should the worst happen. However, following some recent and well-publicised cases of claims being denied, that sense of security has frayed.

We asked two industry experts – ANZ head of life insurance Gerard Kerr and Life & Benefits director Dave Roberts – to clarify why claims may not be paid.

Full disclosure

In essence, a life insurance policy is a contract where a policyholder pays premiums to their insurer, which commits to paying out an agreed sum of money in the case of death (or a diagnosis of terminal illness).

Kerr and Roberts start by pointing out a claim being denied is the exception rather than the rule. And when it is denied it is usually because the policyholder has not provided required information.

“The most common reason claims are denied is non-disclosure,” says Roberts. “The policyholder may have failed to disclose a pre-existing health condition out of fear they wouldn’t be able to get insured at all or that they would have to pay more for their policy.

“Alternatively, it could be an innocent mistake. Any good financial advisor will work with the client to make sure all the relevant information is disclosed to the insurer.”

“Even in cases of non-disclosure, the claim will only be affected if the non-disclosure is relevant,” notes Kerr. “Non-disclosure doesn’t necessarily mean no payment is made, though it may be reduced. It’s also the case that once a policy has been in force for three years it’s harder for an insurer to deny a claim. The onus is then on them [the insurer] to prove intentional non-disclosure.”

Key reasons claims aren’t paid:

  • essential information relevant to the claim wasn’t disclosed
  • failure to pay the premium
  • trying to claim in the initial three-month exclusion period
  • a condition is not severe enough to warrant a payout
  • claiming on a suicide in the first 13 months of a policy.

Non-payment and no-claim periods

“Insurance companies usually provide a grace period longer than the required month and send out reminders. But if you haven’t paid your premium by the due date that will cause your policy to lapse,” says Roberts.

“Also, if you start getting chest pains and rush to take out a life-insurance policy before consulting a doctor and putting it on the medical record, be aware there’s a three-month exclusion period on a range of conditions, including heart attacks.”

“You can get life-insurance policies that only cover accidents,” notes Kerr. “Those policies are cheaper but by definition they won’t cover you for illness.

“It’s a common misconception that suicide voids a life insurance policy. In fact, as long as it [the policy] is at least 13 months old that is not generally the case (some policies vary on this period).

“There can be issues around meeting the criteria with other types of products, such as trauma. For example, depending on the product, you can be diagnosed with multiple sclerosis, and experience only minor symptoms not severe enough to have your income-protection or total-and-permanent-disability policy paid out.

“One advantage of a pure life-insurance policy, which is paid upon death, is you’re either dead or alive, so those in-between issues don’t arise.”

So what is covered?

The good news is that as long as you’ve divulged all the relevant information and paid your premiums, you can be confident the policy will be paid out.

“With a terminal diagnosis you need two independent doctors to certify that in their opinion you have less than 12 months to live,” says Roberts.

“There are no general exclusions for death cover other than suicide in the first 13 months. However, an insurer might apply an exclusion specific to your policy if extraordinary conditions apply and are declared at the time of application. For example, if you regularly travel to a high-risk zone you might not be covered while in that territory. On the other hand, if at some point after you’ve got the policy you decide to visit a dangerous location, you are covered, even though you’ve chosen to expose yourself to that risk.”

“The insurance industry no doubt could be doing a better job of steering clear of legalese. It would be helpful if everyone could use clearer language to explain why a claim could be denied,” says Kerr.

“That noted, it should be emphasised the large majority of life insurance claims are promptly paid out.”