Life Insurance Claims – what to know before you buy.
The most critical factor in buying a life insurance policy is purchase coverage from a company that will be easy for your beneficiaries to deal with after you die. Some of the life insurance companies that offer life insurance with little or no questions may be a nightmare for your family in the future. Understanding the filing process before you buy and discussing it with your heirs is an act of love. Keep in mind that even though you are planning for your loved ones to not struggle financially without you, a life insurance policy is a contract. Unless the beneficiaries follow the claim procedures required by the life insurance company and also required by the local and federal regulations in effect at the time of the claim, the life insurance company will not pay the claim.
Below is the procedure that most life insurance companies follow in paying a claim. After the outline is a more detailed look at each step. Not every step is required on all life insurance claims. You will recognize which steps may apply to you. If you are purchasing a life insurance policy from a life insurance agent, they will help beneficiaries file claims and guide them through the claims process to avoid filing problems.
A certified copy of the death certificate is required.
If the person insured was a U.S. citizen and died outside of the U.S., life insurance companies will ask for a copy of the Consular Report of Death of a U.S. Citizen Abroad. This document is available from the United States State Department.
Beneficiaries complete a claim form that includes information about themselves and the deceased.
If anyone other than the beneficiary is completing the claim form, a court order of appointment is required.
Generally, if the life insurance policy benefit is greater than $250,000 and subject to generation-skipping tax, the schedule R-1 of IRS form 706 is required. Without that form, the life insurance company is required by the IRS to withhold 40% of the death benefit.
If the death occurred within two years of the life insurance policy being purchased, expect the reason for death to be investigated by the life insurance company. Usually, the insurer will have additional forms for this circumstance.
Here is a more detailed look at each of the previous requirements.
The death certificate
A death certificate is an official, government-issued document that indicates the date, time, location, and cause of the death. There may be other personal information on the certificate, depending on the state the document is issued. The funeral home caring for the deceased person will file for a death certificate to be issued, usually within 72 hours of the death. The family member handling the financial affairs of the deceased person should ask for several certified copies of the death certificate. If there are multiple financial accounts in the name of the deceased person, a certified copy of the death certificate will be required to change the ownership of each account.
In some instances, the person requesting a death certificate is in another state, or they may be seeking the death certificate from a foreign country. The immediate family members are usually the only ones allowed to order a death certificate. However, that varies depending upon the local government issuing the certificate. VitalCheck is a third-party service that is reasonably priced and can acquire the necessary documents. Listed on their website is specific information required to request a death certificate from each state and some foreign countries.
Death outside of the United States
When a United States citizen dies outside of the country, the death is reported to the U.S. embassy, consulate or Consular Officers. The U.S. State Department will confirm the death and attempt to locate and notify the immediate family of the deceased. From that point, the State Department will provide guidance and legal representation with the foreign government. Once their work is done, the State Department will then issue the Consular Report of Death of a U.S. Citizen Abroad and provide that report to the immediate family. This report along with a death certificate from the country in which the person died will be requested by the life insurance company.
Beneficiary Claim Forms
Each life insurance company will have its own claim forms. It is important to let anyone that you designate as a beneficiary, know that they are a beneficiary. Claim information will only be released by a life insurance company to a beneficiary or their legal representative. Even if you are a family member, if you are not a beneficiary, life insurance companies will not provide detailed information to you about the deceased’s life insurance policy. Communication directly with the beneficiary is one of the most overlooked aspects of filing a life insurance claim. Many times, a child, relative or friend will contact a life insurance company on behalf of the beneficiary of a life insurance company. Beyond providing claims forms, life insurance companies will not give any further information. If you are trying to help someone that is a beneficiary of a life insurance policy, it is imperative that the correspondence with the life insurance company comes from the beneficiary. If you write to a life insurance company on behalf of a beneficiary and you are not the legal representative of that beneficiary, the life insurance company will probably not respond.
Take the claims process into consideration when you name a beneficiary. If you have children that are under the age of eighteen, they will not receive life insurance proceeds directly if you die before they turn eighteen. Most states consider those children as minors, and they must have a guardian receive the proceeds of a life insurance policy for their benefit. If you do not have a guardian designated, the state government will appoint a guardian on behalf of the deceased person.
If you want to have a minor child as the beneficiary to a life insurance policy, you should name a guardian in your will. It is possible that the guardian of the child and the person responsible for managing life insurance proceeds not to be the same person. If you are filing a claim on behalf of a minor or a beneficiary that is not competent, life insurance companies will require that you provide a copy of the court order showing that the person making a claim has the legal authority to act on the beneficiary’s behalf. If you do not have a will and you have minor children, it would be in your best interest to create a personal will before or in conjunction with buying life insurance. If you have minor children and you have created a will designating to whom the benefits of a life insurance policy will be paid, you would then indicate in the life insurance policy that your beneficiary is your estate.
Generation Skipping Tax
The generation-skipping tax is a tax that is separate from income taxes and different from estate taxes. The generation-skipping tax is a tax that was made to prevent individuals from passing assets to a skipped generation and avoid one generation’s liability for estate taxes. Thanks to the Tax Cuts and Jobs Act of 2018, the generation-skipping tax will not affect most people. However, if you have a highly valued business or a highly valued estate, this tax will come into play. The 2019 generation-skipping transfer tax exemption has increased to $11.40 million, or possibly $22.80 million for married couples. The exemptions are set to revert to their prior 2018 levels in 2026 or when Congress makes changes. The generation estate tax rate remains at 40%.
The life insurance companies are still required to ask if the life insurance benefit being paid will be subject to the generation-skipping tax. If the estate is not subject to the tax, state so on the claim form. If the estate is subject to the tax, the beneficiary will be required to provide schedule R-1 of IRS form 706. The estate tax form is only necessary when the assets of the estate exceed $11.40 million for 2019. That amount may be increased as indexed with inflation.
Death within two years of purchase.
Death within two years of buying a life insurance policy is something that everyone buying a life insurance policy should be aware. If something was overlooked when completing the application, the life insurance company might legally refuse to pay a death claim. If death occurs within two years of the life insurance policy’s purchase, it is within the contestable period. What this means is that if the life insurance company can prove that there was any material misstatements or purposeful omissions the life insurance company can deny paying the life insurance claim. If the death occurs after the two-year contestable period, it does not matter if there was a misstatement or not; the death benefit must be paid. Most of the time if you buy a life insurance policy, you purchase it because you want your loved ones to have financial protection whenever you die. It does not matter if it is one year or longer, you buy life insurance to provide for your family.
I will add at this point an exception to the two-year contestable period. Some life insurance policies are structured to only pay a death benefit if it occurs after two years. These policies are usually purchased by someone that has a health issue and expects to be declined a regular life insurance policy. In those instances, if death occurs within the first two years, the life insurance policy will only pay the return of life insurance premiums. If death occurs after the two years, the regular agreed upon death benefit is paid. These are referred to as guaranteed issue life insurance policies.
Today, the primary emphasis of this article is to detail the claims process for a regular life insurance policy that was not a guaranteed issue policy. A prevalent trend in buying life insurance is the easy application with few questions, no medical information, and a quick issue. If death occurs within the two-year contestable period, that quick and easy life insurance policy may turn out to be a policy that does not pay the expected benefit. If you have not had a medical doctor consultation in a long time, you could make a false statement on some life insurance applications, and the life insurance company may never know. For example, if you smoke and state that you do not smoke, unless the life insurance company requested a blood or urine test, they will not know. Many of the quick and easy issue life insurance companies do not ask every applicant for medical proof to determine smoking.
Chances are if you have been to see the doctor or you have filed for another type of medical insurance that has asked medical questions; your data is in the MIB or Medical Information Bureau. The MIB is a non-profit agency with which insurance company shares health information on their customers. When you complete any health insurance, disability insurance or life insurance application, as part of the agreements on the application you have agreed to have your basic medical information shared. If you have health insurance and a claim was filed, there is a good possibility that the appointment with the doctor was shared with the MIB. Usually, the specific medical information is not shared with the MIB. The information shared may only be the fact that you had a consultation. That is enough information for any future insurance company to ask for the details or question the reason for the appointment. If you did not disclose the appointment on an application, that is enough for the life insurance company to dispute a claim. How the MIB works and what information is shared goes beyond the scope of this article.
The point to make is that if you have not had medical claims or completed an application for insurance that asked for your permission to participate in the MIB, the life insurance companies do not have any data on you. If you state that you do not smoke, but you do smoke, and you indicate on the application that you do not smoke, there is no way the life insurance company will know. Unless you die within the two-year contestable period, if the life insurance company investigates and finds that you did smoke and you stated that you did not, they may refuse to pay the benefit. If a false statement is one that would have only affected the cost, the life insurance company may restate the policy. For example, with a smoker, they would pay a benefit as if it were issued under the smoker rates and pay a reduced benefit. If it is a drastic misstatement, they will decline to pay the death benefit and will only return the premiums paid into the policy.
There is a way to avoid the pitfalls of the two-year contestable period. Buy a life insurance policy that asks for more detailed health information up front when purchasing the policy. If all the details are confirmed up front, there is very little chance that the life insurance company will decline to pay the death benefit.
I have written a life insurance policy for a significant amount of money, and the insured person died within the first year of having the life insurance policy. When the policy was purchased, all of the medical questions were answered thoroughly, the person applying for the life insurance policy had their physicians’ records shared, they went through a basic para-medical exam that included blood and urine test. They were issued the life insurance policy, and by the end of the first policy year the client was diagnosed with lung cancer and died within six months of the diagnosis.
The life insurance policy was purchased from a large well-established company. After the client died, the claim forms and paperwork were completed. The life insurance company investigator called me and discussed the case. Within a week the life insurance company paid the death benefit to the beneficiary.
The reason that there was no trouble with the claim is that the life insurance company had all the relevant medical information and application. Every part of the purchase was done correctly, and there was no reason to delay the payment of the death benefit. That is why people buy life insurance. You never know when your time will come.
Buying a life insurance policy can be an emotionally intense occurrence. You are discussing with your loved ones what to do if you die. Life insurance companies know that this can be a challenging experience for some people, and they try to make it easier by offering fewer steps to buy life insurance. If you truly want to help your heirs not to struggle financially without you, look at all the facts. Plan for the worst, hope for the best and live a happy life knowing that you are there with them no matter what happens in the future.
By Van Richards
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