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Published 02 August 2022
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When Doesn’t Life Insurance Pay Out?

It’s rare for life insurance not to pay out. In the vast majority of cases, insurers pay the lump sum as the policyholder intended. But it’s worth knowing why a handful are declined and what you can do to help make sure yours isn’t one of them.

If you’re thinking of taking out life insurance, it might be reassuring to know that in most cases, insurers pay out when the policyholder dies.

It’s natural to be curious about the small percentage of claims that don’t go as well, though. After all, the whole point of life insurance is to get peace of mind that your family would receive a lump sum if you die while your policy is in place.

Here’s what you need to know about claims that aren’t paid and what you can do to help prevent issues with your policy.

Does life insurance always pay out?

Life insurance doesn’t always pay out, but for the majority of claims it does. According to the Association of British Insurers (ABI) and Group Risk Development (GRiD), 97% of life insurance claims were paid in 2021, with an average payout of £80,485 per claim.

For whole of life insurance, where cover lasts a lifetime rather than a set period, payout rates were as high as 99.9%.

This is the overall industry picture, though. Different providers offer different claims stats, though over 95% is common. When you get a quote for life insurance you can usually compare the claims rates of each provider, if that’s important to you.

Look beyond the percentages

It can be useful to consider claims stats, but there isn’t usually a lot in it between insurers. Also consider that you’re not necessarily comparing like for like, as not all providers have the same criteria for turning down claims.

It’s easy to get distracted by claims stats, and insurers understandably often take every opportunity to promote high payout percentages. It’s important to consider if the cover features are right for you, and the life insurance premiums you will pay are affordable.

What are the reasons life insurance may not pay out?

Insurers are clear about reasons why they might not pay out in their policy documents. So before you take out cover, take the time to read the small print.

Below are some common reasons why claims are not accepted.

You weren’t truthful when you applied

Not answering the application form questions accurately, offering misleading information, and concealing anything the insurer needs to know are common reasons for insurers not to pay out in full, or at all.

When you apply for life insurance, you’ll answer questions about your health and lifestyle. This includes information about any medical conditions, if you smoke, how much alcohol you drink and your height and weight. Read the application questions carefully, including the definitions. For example, if you’ve used tobacco or nicotine replacements such as e-cigarettes in the past 12 months, even occasionally, you’ll usually be considered a smoker.

It’s crucial to be open and honest and accurate in your answers, so that nothing comes to light later that may cause an insurer to question a payout. If you’re not sure about an answer, say that, so the insurer can look into it, rather than guessing.

Once your policy has started, you shouldn’t need to update your insurer about changes, like quitting smoking or developing health issues. Your premiums are based on your circumstances when you took out the policy.

» MORE: How does smoking affect life insurance?

The cause of death is excluded from the policy

If you have exclusions written into your policy, making a claim on what isn’t covered won’t result in a payout.

So if your policy exclusions include death from a specific condition or an accident while doing a risky activity, there would be no payout if that was the cause of death.

When insurers assess your application, they look at your health information and any conditions you have, along with other factors such as a risky job or hobby. If the risk of a claim increases because of any of these issues, it may be written into your policy as an exclusion.

More generally, insurers usually won’t pay out if a policyholder dies due to:

  • drug or alcohol misuse
  • terrorist activity or war
  • reckless activity or gross negligence
  • suicide during the first year

Exclusions vary widely depending on the insurer and the individual, so check the small print before taking out the policy.

You’ve missed premium payments

Your part of the deal, as well as disclosing all relevant information, is to continue to pay premiums that are due. If you miss premiums and don’t pay what’s due within a specific timeframe, such as 60 days, the insurer may cancel your policy and may not pay out.

If you have a waiver of premiums as part of your policy and can’t pay premiums for a while after an accident or because you are ill, this shouldn’t affect a payout. This is provided you let your insurer know and keep to the terms of that benefit.

If you think you’ll have trouble paying premiums at any time, get in touch with your insurer as soon as possible so you can agree to a plan before your policy is cancelled.

You die during the waiting period

Some life insurance, particularly over 50s cover, has a short period of time after the start date during which an insurer won’t pay out if you die. This qualification period before your policy takes effect might last from 12 months to 24 months.

Life insurance policies won’t typically pay out during this waiting period, though accidental death may be covered and any premiums already paid should be refunded.

After the waiting period, most insurers will pay out if someone takes their own life. But this can depend on the circumstances of the death and the provider.

If your life insurance includes early payment if you are diagnosed with a terminal illness, you may not be able to make a claim for this during the waiting period. There is also usually a maximum life expectancy. So if the medical diagnosis is that you are expected to outlive the insurer’s maximum life expectancy, which is usually 12 months, there would be no early payout.

You outlive a term policy

If you outlive your term life insurance policy, there will be no payout. Term life insurance lasts for a specific length of time, such as 20 years, which you agree to when you apply.

After that time, your policy will end and you won’t get anything back if you’re still alive and kicking. So any claim after that will be turned down, as the policy won’t be in force any more.

How long does life insurance take to pay out?

It can take from a few days to a few months for a life insurance policy to pay out after a valid claim. During the pandemic, the ABI reported that one insurer paid a £250,000 claim just a day after receiving notification that someone had died.

How soon it reaches your beneficiaries, who are the people you leave any payout to, depends on a few things. If the policy isn’t in a trust, the payout will be counted as part of your estate when you die. Before the executor can start to distribute the estate, including the life insurance lump sum after any debts are paid, they need a grant of probate (or confirmation in Scotland). The probate process can take anything from eight weeks to a few months.

Some insurers offer partial payment ahead of that and while the claim is being handled, to help with the cost of a funeral. Check for this benefit, if it’s important to you.

If the life insurance policy is in a trust, the payout should get to your beneficiaries quicker, as it won’t be counted as part of your estate.

» MORE: How to put life insurance in a trust

What can you do if a life insurance claim is declined?

If the insurer turns a claim down or offers a reduced payout, there are steps you can take if you feel it’s an unfair or wrong decision.

This is the order of escalation you could take, if you’re unhappy with how the insurer has dealt with a claim:

  • Speak to the insurer. It may be able to help explain or resolve the issue with a little more information.
  • Make a formal complaint to the insurer if the situation still isn’t resolved and you’re not satisfied with the decision. The insurer will explain how to do this and has to respond within eight weeks.
  • Make a complaint to the Financial Ombudsman Services (FOS) if you aren’t happy with the insurer’s response to the formal complaint, or if you’ve heard nothing back for over eight weeks.

Try not to let a minority of declined claims put you off taking out protection you might need for your family. It’s worth knowing that, according to the ABI, in 2021 insurers paid out more than £3.8 billion in life insurance claims to support bereaved families. Also bear in mind that it’s in an insurer’s best interests to maintain a high percentage payout rate.

Image source: Getty Images

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