Many people get life insurance to protect the loved ones they may leave behind. But did you know that in Maryland, your life insurance can legally refuse to pay out sometimes? I just had a client ask me questions about some life insurance for a family member and it made me think about a case I had years ago where I learned this little secret of the insurance industry.
Years ago I had a very nice lady come to me whose husband had passed away of a heart condition. They had recently married, and he had taken out $100,000 in life insurance to provide for her if he passed away. When he died, the insurer trolled through his medical records and found an old leg condition that existed for years. He neglected to mention it on his life insurance application. It didn’t have anything to do with his death, but that didn’t matter. They refused to pay the claim and offered to refund the premiums for the policy.
The lady hired me to investigate. At first I thought she had a slam dunk win and was ready to file a lawsuit against the insurer. But I discovered something I didn’t know while researching her options.
In Maryland, a life insurer can decline to pay your claim if you lied or concealed something on the application, but only if you die within 2 years of taking out the policy. The insurer essentially gets a 2 year window to revoke your coverage for good cause. After 2 years they cannot do this even if you lied on the application. That 2 year lookback starts when you take out the policy, and the clock will restart if you make any significant change to the policy, like increasing coverage or adding new beneficiaries.
The insurer can legally revoke your coverage if your lie or ommission was “material”, meaning it affected whether or not they would have offered you insurance, or the rate they would have charged. Most often, this involves things in your medical history like smoking, or a chronic condition, or participating in a high risk activity. Your answers to those questions affect whether you get insurance, and how much they will charge you.
If you smoke and lie about that on your application, then you run the risk of not having insurance if you die (of any condition, not just smoking) within 2 years. After 2 years, you are safe. They cannot challenge your application, even if you did lie on it. Sounds arbitrary, but this works like a statute of limitation, and most statutes of limitation are arbitrary.
So I had to tell this sweet lady that she was out of luck, all because her deceased husband tried to hide his chronic leg condition from the life insurer. If he had lived one more year, it would not have mattered. I felt so bad for her I returned the fee she paid me.
The lesson – Don’t lie on your insurance application, and if you do, be very careful for the next two years!