When Your Life Insurance Can Refuse to Pay

You should get life insurance to protect the loved ones you may leave behind. And you probably think your loved ones are perfectly safe after you sign on the dotted line.

But did you know that in Maryland, your life insurance can legally refuse to pay out sometimes?

I had a case years ago where I learned this little secret of the life insurance industry. They hide it in the law so most people don’t know about it. I will share that “secret” with you, so you don’t make the same mistake that left this very nice lady in a bad situation that was not her fault.

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. They only offered to refund the premiums for the policy. So she got a check for less than $1000 when she was expecting 100 times that amount!!!

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 if they find any discrepancy on your insurance application.

Maryland law (the Insurance Code at § 16-203) says “each policy of life insurance shall contain a provision that the policy is incontestable, except for nonpayment of premiums, after the policy has been in force during the lifetime of the insured for 2 years after its date of issue.”

See what they did there? They start out saying your policy is “incontestable,” which sounds great, and then they go on to make a major limitation to that great sounding protection – your policy has to be in effect for 2 years. That is how they sneak in the 2 year look back rule I am describing in this post.

After 2 years they cannot contest your policy even if you lied on the application. That 2 year lookback starts when you take out the policy. And you better know the 2 year 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 insurance coverage like this if your lie or omission was “material” – meaning it affected whether or not they would have offered you insurance in the first place, or the rate they would have charged you.

That second part is what denied the claim for the lady I represented. Her husband’s leg condition had nothing to do with his death, but the life insurer would have charged him more money for his premium if they had known about it. So they get to revoke the entire policy because of that technicality!

Most often, “material” omissions involve 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, or have another medical condition, and lie about that on your application, then you run the risk of not having life insurance if you die (of any condition, not just the condition you lied about) 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 hid his chronic leg condition from the life insurer. He may have innocently forgot about it. But it cost his wife dearly. 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. I couldn’t take any more money from her!

The lesson – Don’t lie on your insurance application, and if you do, be very careful and don’t die for the next two years!

Next Steps

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