Life insurance, as well as disability insurance and any other type of insurance is a promise. It's a promise made on behalf of the insurance company to pay you for a loss, whether you lost your life, your ability to work or anything else stated in the policy. But more than just a promise, which can be broken, your life insurance policy is a contract. Legal and binding, it has plenty of legal jargon involved, which you, as a policy holder, should be fully aware of.
When you look at a brochure for an insurance policy there is usually a section in the back that describes "limitation and exclusions", or something to that effect. This list can be long or short, but either way you should take a few minutes to understand what is covered and what won't be covered if you suffer a loss.
A good agent will be happy to discuss this with you beforehand. At first glance, most of the items are common sense, but some can be confusing. And some will be altered or "re-interpreted" if need be.
For example, almost every life or accident insurance policy I have seen has an exclusion for loss as a result of terrorism. This was widely seen and described by agents in the following scenario: You go to the Middle East and a bomb goes off. If you die, the company isn't paying.
However, shortly after 9/11, with thousands dying as a result of a terrorist act, life insurance waived this exclusion. Their explanation was that the exclusion was for "foreign" acts of terrorism, in another country, even though that was not stated in the contract at all. Personally, I think they made the exception because they knew it would be a public relations nightmare if they enforced the terrorism exclusion when emotions were already incredibly high.
If you take a look at the list of exclusions, some make sense. For example:
- Losses due to acts of war. Life insurance, as well as other types of insurance, rarely cover you if you are hurt or killed in a war. Some will even state that the war can be "undeclared", which is broad. The military does offer some small policies, but be aware of what you're buying.
- Losses due to self-inflicted injury. This makes sense. If you stab yourself, you should not expect the insurance company be on the hook for you. Accidental deaths will usually be covered.
- Suicide. Generally speaking, life insurance companies will pay, but after a "contestability period", which can be a few years, as stipulated in the policy. Things can get tricky if the insured dies of a drug overdose during that time and the insurance company would need to have proof that the overdose was intentional.
- Losses that occur while committing a crime. If you decide to rob a bank and the guard shoots you, don't expect the insurance carrier to pay your loved ones.
- Murder. Believe it or not, there is a "slayer rule", which means that if your beneficiary kills you, the policy does not have to pay them. Go figure.
