How to Guard Against a Deadly Life Insurance Flaw

Just the thought of buying life insurance makes people shudder. But far worse is the thought of the insurer refusing to pay the policy when death does occur. It happens every day. Families get letters from insurance companies saying the money they expected to survive on isn't coming after all.

Most states, including Florida, specify that for two years after life insurance is bought, the company can contest its validity by claiming that a material misrepresentation was made in the application for insurance. Although the two-year period is a narrow window, it catches too many families and destroys their finances at a very bad time, often following the death of the family's main bread winner.

The process I'm describing is called postclaims underwriting. When an insured person dies within this two-year period, the insurers get every scrap of past medical records and use a microscope to examine them to see if there had been any undisclosed medical condition. Under most laws, it doesn't have to be a condition that would have led to death, only a condition for which a little additional premium would have been charged. Incredibly, under our law, that's enough for an insurer to deny the death claim and refuse to pay the policy.

In my experience, most misrepresentations aren't intentional but result from the consumer's lack of sophistication in medical knowledge when filling out the application. They also result from the insurer's slipshod practices in not adequately investigating potential customers' health before rushing out to collect the policy premiums. Only if the laws are changed will the purchase of life insurance guarantee the safety of our families once we depart this life. Until then, only the profits of insurance companies are guaranteed.

As a California court has said, "If the insured is not an acceptable risk, the application should be denied up front, not after a policy is issued." In that state, postclaims underwriting is permitted only when the insured intentionally misrepresents his or her health. Why don't insurance companies investigate the facts stated in an application before issuing the policy? Easy. Without doing that, they can immediately start to collect premiums. Present law permits exactly that.

So what do you do to protect your family besides wish for backbone from our legislators to pass better laws? As a start, you don't trust life insurance companies and their insurance agents. The agents usually earn commission based salaries and get promotions for increasing business. They don't want to find out about customers medical impairments. They don't make money by finding out your problems and accurately writing them down on the applications. There are good ways to protect your families. Next week, I'll tell you about them.

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