Life insurance policyholders are empowered to cancel their policy at any time for any reason. Life insurance providers can also cancel a customer’s policy under certain conditions. People often question whether health alterations can lead to a life insurance policy cancellation. Let’s take a look at the answer to this commonly asked question.
Valid Reasons for a Life Insurance Provider to Cancel a Policy
If a customer stops paying life insurance premiums or commits fraud when applying for life insurance, the provider can legally cancel the policy. Once the payment deadline comes and goes, life insurance policyholders are provided with a grace period that typically lasts 30 days. The life insurance company transmits a notification of late payment, providing the policyholder with a grace period. If this grace period passes and payment is not provided, the insurance company can cancel the policy.
Misstatements on the Life Insurance Application Form
The issue of fraud is a bit more complex. If you lie about your health or anything else on the life insurance application form, the insurance provider can cancel the policy during the contestability period. This period usually extends across the initial year or two years of the life insurance policy. If the life insurance provider fails to contest the supposed lies or half-truths on the insured party’s life insurance application within the contestability period, the policy will prove valid. If the life insurance policy includes an incontestable clause, the insurance provider will not be able to cancel the policy, even if there is a material misrepresentation on the application until the policy has been in place for a year, two years or other period designated for contestability.
Let’s take a look at a specific example to further illuminate the issue of misstatements on life insurance applications. Life insurance misstatements include the failure to disclose a health condition or illness such as diabetes or multiple sclerosis. Even failing to disclose a lifestyle choice such as chain smoking or participation in risky activities is grounds for cancellation.
Invalid Reasons for a Life Insurance Provider to Cancel a Policy
Life insurance applicants should be completely truthful when filling out the application for this important financial safety net. Tell the truth on the application, pay your premiums on time and in full and your coverage should continue for the length of the policy. If your health changes during the course of the policy, the life insurance provider cannot cancel the policy. It does not matter if you started an unhealthy habit such as smoking or drinking copious amounts of alcohol after purchasing the policy. You can get sick, eat junk food for every meal, suffer a personal injury and have myriad other health issues without worry that your life insurance provider will cancel the policy.
Considerations for Life Insurance Policy Holders who Suffer Health Setbacks
If you become sick or have another health crisis after taking out your life insurance policy, do not assume you are powerless. Continue to pay your life insurance policy in full and on time to ensure your designated beneficiary receives the policy’s proceeds after you pass away. In fact, the nuances of your policy’s contract might allow you to obtain financial assistance from the policy while you are alive. In some cases, life insurance policies accumulate a cash value, allowing the policyholder to take out a loan against this value to help cover the cost of medical bills. However, if you take out a loan against the policy’s cash value, it will decrease the death benefit.
Check to see if your life insurance policy has an accelerated death benefit rider. If this rider is present, you might be eligible for part of the death benefit while still living. This benefit can be in a lump sum or in installments. Refer to the policy’s idiosyncratic language to determine the structure of the death benefit payment. If your life expectancy is less than two years, the proceeds will be non-taxable.
There might also be the option of a viatical settlement in which you can sell the life insurance policy for 40 – 85% of its face value. Take this route and you can use the cash for whatever you desire. The policy death benefit is paid to the company that purchased the policy as opposed to the designated beneficiary when you depart this plane of existence.
What to do if Your Life Insurance Provider Illegitimately Cancels Your Policy
Do not assume you have no avenue for recourse if your life insurance provider cancels your policy due to health reasons. Plenty of life insurance providers will attempt to stretch the truth by arguing policyholders misrepresented health or lifestyle facts on the initial application. Do not go down without a fight. Reach out to the life insurance provider to explain your side of the story. If the insurance provider does not reinstate your policy, contact an attorney to pursue legal action.