Life insurance policies function as contracts. They stipulate certain actions or conditions upon which they will not pay out proceeds to beneficiaries. While specific provisions apply to each policy, the most common reasons for the insurer to void the policy, i.e., deny benefits, include a mix of the expected and unexpected.
Standard provisions that limit or deny proceeds include policy replacement and dangerous or illegal activities, even if unknowingly performed. Most life insurance policies contain an incontestability clause that permits insurers a period of time to investigate or deny claims.
Situations in which investigation may arise include suicide or withholding information on the application. After the contestability period, insurers must prove fraud. A common issue of dispute concerns an insurable interest, or an established relationship between the insured and the beneficiary.
Spousal beneficiaries do not automatically lose beneficiary status
A case brought before the Oklahoma Supreme Court resolved a conflict between laws that related to beneficiary changes, an insurable interest, to a life insurance policy during a divorce proceeding. An initial policy purchased by a husband put his wife and brother as sole and contingent beneficiaries, respectively.
Terminally ill, the husband altered the policy before a hearing to dissolve the marriage. A trial court ruled the husband’s changes illegal, restoring the original beneficiaries. Yet, the trial court also granted the now-dead husband’s divorce petition.
The wife appealed against the insurer’s denial of benefits. The court analyzed two conflicting laws in rendering its decision. Under Oklahoma law, a divorce automatically revokes an ex-spouse’s status as a beneficiary. A separate law, however, separated issues of divorce determination and other issues, e.g., property division, to other dates. Ultimately, the decision in favor the wife found that the specific statute that states a final judgment on divorce occurs after all issues resolved overrode the automatic spousal exclusion.
Experience matters
Individuals and families can rely on life insurance proceeds to provide support during the transition from life before and after an insured’s death. A new precedent has established a new application of how the life insurance extends into other areas of the law. Attorneys familiar with developments in the law can provide guidance.