The 6 Life Insurance Exclusions to Be Mindful Of

Taking out a life insurance policy is like signing up for any other insurance: you must read the fine print.

Health insurance policies often have exclusions for pre-existing or other specific conditions. Home insurance policies can exclude things like floods or other natural disasters. And many types of life insurance policies have exclusions you don’t want catching you off guard when you file a claim.

But unlike other types of coverage, your life insurance is designed to be life-or-death. Missing an exclusion could mean your loved ones don’t benefit from the policy you intended for them to be taken care of after you’re gone.

Before you sign up for a long-term life insurance policy, watch for these 6 common life insurance exclusions in the hidden clauses.

1. Missing Insurance Premiums

We’ve all been late on our bills before, but for some of us, it’s a habit. It’s understandable when you’re juggling so many other responsibilities, especially in jobs like medicine, where emergencies take priority over remembering to pay a bill.

But late life insurance premiums can mean a lapse in coverage at the worst possible time.

A lapse occurs when the insurer doesn’t receive the premium payment as stated in the life insurance contract. The policy’s terms are breached, so the insurance company is not responsible for holding up their end of the contract and can cancel coverage.

This cancellation doesn’t usually happen the instant a payment is late. Most insurers provide a grace period during which the policy is easily reinstated upon payment.

However, none of us know exactly when our time on Earth is up. If your policy has lapsed because of non-payment, and you pass before the premiums are caught up, your beneficiaries will not receive the death benefit.

Another downside to late payments is that if the insurer chooses to cancel your policy for a lapse, it will likely cost you more to get another insurance policy in the future.

2. Pre-Existing or Undisclosed Medical Conditions or Misrepresentation

One ambiguous area that people are often confused about is whether an insurer can deny coverage due to pre-existing medical conditions.

Although the Patient Protection and Affordable Care Act (ACA) eliminated discrimination based on pre-existing conditions in healthcare insurance as of 2014, this legislation doesn’t apply to life insurance policies.

Some conditions, like cancer, heart disease, and poorly managed diabetes, may disqualify a person from life insurance. Instead of completely eliminating the policy, an insurer may exclude the health condition from its death benefit payout or charge higher premiums.

Note that a recent past diagnosis of one of these conditions reflects differently than one that was resolved 10 years or more ago. Your life insurance advisor can help you recognize if you have an uninsurable medical past.

However, you do want to disclose all of your diagnoses, whether you consider them significant or not.

If you had a medical condition you didn’t disclose — and that issue caused your death — even though it would fall under “natural causes,” the insurer may not pay.

Finally, also be aware that material misrepresentation is another exclusion. Your life insurance advisor should remind you before you sign your policy that any incorrect, false, or misleading information on the application can result in forfeiting the insurer’s life insurance payout obligation.

3. Self-Inflicted Harm

Suicide is almost always an excluded act in term life insurance and permanent variants. The insurer will research your medical background to look for:

• Instances of suicidal ideation
• History of a suicide attempt(s)
• A diagnosis of post-traumatic stress disorder (PTSD)
• Any history of severe depression or anxiety

If you’re being treated for these diagnoses, and they are well-managed, the insurer might decide to offer coverage at a higher premium.

We never suggest avoiding mental health treatment out of concern that it could adversely affect your ability to obtain a life insurance policy.

Some policies have a time clause instead of a complete exclusion period. For instance, if a suicide occurs within one year from the inception, the insurer can refund the premiums or deny the death benefit entirely. Most policies have a clause excluding coverage for suicide, especially if it occurs within a certain period (e.g., two years) after the policy’s inception.

In some cases, if the insured dies by suicide within the exclusion period, the suicide clause will state that the life insurance company will refund the premium payments as a lump sum rather than paying out the death benefit.

4. Dangerous Activities

Another area of consideration in both term and whole life insurance policies is your profession. Policy exclusions often include risky hobbies or high-risk jobs.

Life insurance coverage is offered based on quantified risk. If you’re seen to be a high risk because of your dangerous profession or hobby, but removing that activity makes you insurable, the insurer can offer a policy with that particular cause of death removed.

Depending on the numbers, some companies see a strong, low-risk lifestyle as a good balance for a high-risk job or hobby. Instead of excluding the activity entirely, they may cover it with a higher premium.

Although this is not an exhaustive list, here are some examples of professions and hobbies that could impact your ability to get life insurance coverage:

• Outdoor careers such as fishing, hunting, or logging
• Working in aircraft professions as a pilot or engineer
• Construction and roofing jobs
• Driving vehicles, including sales work, truck driving, and recycling/garbage collectors
• Working on a ranch, farm, or in agriculture where heavy machinery is frequently used
• Engaging in risky hobbies or professions like rock climbing, skydiving, and regular scuba diving

These potentially dangerous jobs and hobbies may increase your risk score, placing you in the higher risk category of insurability. If your profession or hobby keeps you from obtaining life insurance, an exclusion clause could be beneficial. But if you are determined to have coverage that includes that activity, guaranteed acceptance life insurance is a potential avenue to consider.

5. Acts of War and Terrorism

Just as the COVID-19 pandemic increased insurer descriptions of health coverage exclusions, the 9/11 terrorist attack caused insurers to dig deeper into their definitions of Acts of War and Terrorism.

After September 11th, 2001, many life insurance providers excluded civilian deaths occurring as a result of injuries and death from any war or terrorist act.

Since the term “terrorism risk” is relatively new, its definition continues to evolve in the insurance industry. Without data — which only comes after an act of terrorism — it’s challenging to have numbers to gauge risk scores and premiums. Pricing depends on the market and includes the perception of risk in a particular building or area.

Although it’s illegal for insurers to exclude acts of war and terrorism as a whole, the industry continues to be in flux regarding what is and isn’t covered. Currently, the Acts of War and Terrorism legislation excludes chemical, biological, and radiological perils and any acts that occur during a declared war.

6. Illegal or Criminal Activities

When the insured’s death happened because of their conduct in an illegal or criminal activity, the death benefit will probably not payout. This includes activities like:

• DUIs
• Drug overdoses
• Illegal protests

In many cases, illegal activities aren’t determined until the investigation is closed. There is usually a two-year contestability period an insurer is allowed, during which time they can investigate the claim for possible illegal or criminal activity or misrepresentation. However, this time frame varies depending on how complex the case is and what state laws dictate.

What to Be Mindful of When Setting Up Your Life Insurance Policy

In addition to potential exclusion factors, there are a few other areas to be mindful of when you’re choosing a life insurance policy:

Type of Life Insurance

The first category you’ll address is whether you want term or permanent coverage. Term, or temporary, life insurance has its advantages if you are young, relatively healthy, and in need of affordable insurance in case of an accidental death. Permanent, or whole life, acts as an asset, building cash value and other benefits during the life of the policy.

Learn More: Everything Physicians Need to Know About Life Insurance

Other Factors That Matter With Your Life Insurance Policy

While term versus permanent coverage is important, other factors could limit your options.

Age Matters

The younger you are when you take out a policy, the more choices you have.

By the time you’re a senior, you may not qualify for term coverage, which includes an age limit of 75-86 years old. Permanent life insurance usually has no maximum age limit, but will be more expensive the older you are.

Health and Lifestyle

The same idea applies to your health and lifestyle. The average person is healthiest when young. If you haven’t had any medical diagnoses, your risk factor is lower, lowering your insurance premiums.

Beneficiary Goals

Consider the goals for your beneficiaries, too:

• Do you want to ensure your policy pays off any existing debt and permits your loved ones to live comfortably?
• Are there future costs, such as weddings or college, that you want to plan around?

Work with a financial advisor to ensure your death benefit is enough to care for your loved ones in the manner of your preference.

Who Your Beneficiaries Are

Finally, carefully decide who your beneficiary or beneficiaries will be. These parties are usually close family, but can be anyone with an “insurable interest” in your life.

This term says the beneficiary has more to gain with you alive than dead (whether financial or something else). You may be asked to name a primary beneficiary (the first in line to receive the death benefit) and a contingent beneficiary, who receives the death benefit if the primary beneficiary passes first.

Be cautious of stating irrevocable beneficiaries, as these parties cannot be changed. Naming a minor child as a life insurance beneficiary also has complexities — you’ll need to appoint a guardian to receive the payout on behalf of the minor.

Some people choose to establish a trust instead, permitting a trustee to oversee the account and distribute funds according to their directions.

Conclusion

Signing up for a life insurance policy is a big and vital step in your financial health journey. However, your signature on the policy documents isn’t the final step.

The information must still go through underwriting for approval. Watch for changes in the fine print, such as risky activities or suicide exclusion.

Work with a financial advisor you trust to have your best interests in mind — like our expert professionals at OJM Group — and take your next step to a healthy and prosperous economic future today.