Do my children get life insurance if I have not disclosed a terminal illness?

Dear Penny,

I have a $1.5 million life insurance policy with my two children as beneficiaries. I have a degenerative condition called spinocerebellar ataxia type one which was diagnosed a year before I bought the policy. This is a rare condition that is not well known.

After all, the disease will keep me bedridden. When he dies, will the company pay the death benefit? Or keep it when I died due to a degenerative disease? As I recall, there was no place on the registration form to state Ataxia. There were questions about multiple sclerosis, which is better known.

I want to cancel the policy if there is no benefit to it. I was diagnosed in 2014 and bought the policy in 2015.

– Desperate single mother

Robin Hartill [ The Penny Hoarder ]

Dear Desperate,

I cannot promise you with 100% certainty that your policy will pay the death benefit. But in all likelihood, your kids will get that money without a problem.

For starters, it’s actually quite rare for insurers to delay life insurance claims or deny them altogether. In 2019, life insurance companies disputed about $600 million worth of new claims, according to the American Council of Life Insurers. That amounts to less than 1 percent of the $78 billion paid out to beneficiaries that year.

A waiver is most likely to happen when someone dies within the two-year contest period, which usually runs from the time you get your policy. Basically, if you die within that two-year window, the insurer can investigate your claim for “material misrepresentation.”

This can include outright lies on an application, such as lying about a cancer diagnosis or a drink-driving conviction, or claiming to have a desk job when you really have a dangerous occupation. But material misrepresentations can also result from honest mistakes. Some people fail to mention on the application a prescription or procedure they had years ago simply because they have forgotten it.

The company can deny the claim if you die during the dispute period and it finds evidence of material misrepresentation, even if your death has nothing to do with the information you didn’t disclose. If you lied about a cancer diagnosis and then died from a lightning strike, they can still deny your claim. The vast majority of claims will be paid out when someone dies within the claim period. It’s just that the insurer will usually look into them a bit more.

In your case, apparently the two-year period for contesting has long since expired. It would be highly unusual for an insurer to investigate your claim in the circumstances you describe. But it can still happen if the company suspects fraud.

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“A life insurance carrier could technically deny a claim after the dispute period if it suspects the insured has committed insurance fraud or if the insured willfully misrepresents the application,” said Jason Veers, president and owner of Insurance Experts Solutions Inc., a based in San Diego Insurance Brokerage.

Your situation is difficult. Although the application did not specifically ask about your illness, it likely included questions where you were expected to disclose any conditions not mentioned.

Most applications include detailed questions such as: “Have you ever been treated or told by a member of the medical profession that you have high blood pressure, heart problems, or joint problems?” or broad questions such as: “In addition to what you have already disclosed , in the past five years, have you consulted or been treated by another practitioner or physician, or received any other treatment not disclosed?’

“Most of these questions will reveal any health history of the app,” Veirs said.

Again, it would be unusual for your beneficiaries claim to be denied given how much time has passed since the policy was issued. You have spent years paying the premiums on this policy. It is very likely that your children will receive your death benefit.

If you’re okay with these odds, you can continue to pay your policy premiums knowing that your money probably won’t go to waste. However, it is especially important not to let the policy lapse. If the policy expires and you reinstate it, you will trigger a new two-year dispute window.

The big question to ask yourself is: would the money you spend on premiums make life easier right now? I ask because you signed your letter as “Desperate Single Mother”. If you are struggling right now and your children are grown and on their own, you may not need life insurance at all. The purpose of insurance is to protect against financial loss. It’s okay to decide that you need money in your pocket now more than your kids need a life insurance payout someday.

My final advice is not for you, the writer, as we cannot turn back time. But for any readers shopping for a life insurance policy: It can be tempting not to disclose a diagnosis on your application, especially if you’re confused about whether it’s necessary. But it’s in your best interest to err on the side of disclosure.

The purpose of purchasing life insurance is to protect your family financially. Make sure you know for sure if the policy you are buying will actually provide protection.

• • •

Robin Hartill is a certified financial planner and senior writer at The Penny Hoarder. Send your tough money questions to [email protected].

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