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Is your life insurance worthless?

Posted at 5:31 AM, Nov 18, 2014
and last updated 2014-11-18 09:55:51-05

Everyone will tell you about the importance of having life insurance, but life insurance is only valuable when you understand it. Knowing why you need life insurance and comparing policies to find the right one for you is only the beginning. It is just as important to read the fine print, find the exclusions and discover the loopholes that could render life insurance worthless.

Lying

The most common mistake people make when it comes to life insurance is being dishonest to get a lower rate. The law in all 50 states includes something called a contestable period, the first two years of coverage where an insurance company can cancel your policy and deny your claim if they find out you lied on your application. This could be about the year, month or even day of your birth as well as health conditions. It usually doesn’t even matter if the way you died has nothing to do with the lie you used. Be assured, insurance companies will thoroughly investigate any claim made before paying out. It’s a good idea to always tell the truth … especially on your insurance application.

Suicide & Illegal or Dangerous Activities

There are several other technicalities that can render your life insurance policy useless. Usually, the suicide clause specifies that a company does not need to pay out death benefits for anyone who brings about their own death during the first two years of coverage. (It is assumed a suicide more than two years after insurance was purchased or increased was not planned at the time of purchase.) Some companies refund your beneficiaries the premium payments you made until the time of your death.

Across the board, dying while participating in illegal activity usually voids your coverage. In addition to illegal, companies often specify activities they consider “dangerous” that they will not pay out for (think extreme sports). It’s important to read the contract carefully in case you plan to partake in the activities a company may deem unsafe.

Do You Really Need It?

So there are many reasons you might need life insurance but if you don’t, paying for it can be a waste. While you will likely get a lower rate the earlier you purchase life insurance, it’s important to look at your entire financial picture before you jump in. Why do you need to be covered? Do you have a mortgage you would like to pay off in case you died? Do you have children or nieces and nephews who depend on you financially? Do you have parents or siblings who rely on you financially to get by? These questions (and more) can help you determine if there is a reason to pay premiums and just how much life insurance you need.

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