You’ve decided to take out life, critical illness or disability insurance. Good choice! Your decision will protect you or give your loved ones peace of mind. Now it’s time to make sure you meet all the conditions for your insurer to pay your benefits or pay the insured amount in the event of your death. Here are three common reasons why an insurer may refuse to pay out:
You lied or omitted information on your application form.
Why do you have to be honest on your application? To be insured. When you take out insurance, you have a duty to complete your application truthfully. This means that you must disclose, to the best of your knowledge, all information requested by the insurer. For example, if you have ever had cancer, you must declare it, even though it may increase your premium.
Be aware that an insurer can cancel or reduce the amount stated in the policy within two years of its coming into force if it finds that you made a false statement or forgot to mention something. You would lose your coverage, and this information would be added to your Medical Information Bureau (MIB) file, a resource used by Canadian and U.S. insurers that collects medical and personal information from life insurance applicants to prevent fraud and reduce costs.
What’s more, if you’ve been insured for more than two years and an insurer finds that you made a false statement with the intent to defraud it, it can also cancel the policy.
Among the information frequently omitted by insurance applicants is smoking status. Because smoking dramatically increases premiums, some people choose to declare themselves non-smokers on their application form. However, if you purchased life insurance when you were a smoker and have not been a smoker for 12 or more months, you can inform your insurer. That could reduce your premium! And if you were (truthfully) not a smoker when you bought your life insurance but you start smoking, you don’t have to tell the insurer. However, if you terminate your insurance to buy other insurance, you will pay the smokers’ rate.
Generally speaking, for life insurance, you don’t have to inform your insurer of a change in your health status if the policy is in effect. Your health is relevant only when the policy is issued. However, this may be different for critical illness and disability insurance.
Your situation falls within the exclusions of your policy.
When your life insurance policy is issued, it will set out certain exclusions. Some are standard for all life insurance, such as death by suicide, which is not insured if it occurs within two years of the policy coming into force. Death attributable to high-risk activities such as skydiving, scuba diving, rock climbing or auto racing is often included in standard exclusions. If you participate in these activities, it’s essential that you mention it when applying for insurance.
Some exclusions specific to your situation could also be added to the policy. Your disability insurance may not cover nervous disorders. This means that if you’re diagnosed with depression, for example, your insurance wouldn’t pay you any benefits.