When life insurance doesn’t pay out

Life insurance can help to limit the financial impact of your death for your loved ones.

But while it pays out a whopping 96% of the time, according to industry experts, what about that 4%? When does life insurance fail to pay out?

Is life insurance necessary?

It’s a morbid thought but we are all going to die. Bizarrely this indisputable fact of life doesn’t mean everyone needs life insurance.

Life insurance is designed to pay out a lump sum to the financially dependent loved ones you leave behind. The payoff takes care of any commitments you had in terms of a mortgage or debts and to act as support for a loss of income to your family.

But if you are single, renting a house and there is absolutely no one depending on you financially then it is unlikely that you would need any cover and would perhaps benefit from another form of insurance like income protection.

[Related story: You're never too young to buy life insurance]

The policy trap

Whenever you buy any type of insurance you should be given policy information explaining everything about your cover. This will set out what your policy does and doesn’t cover. It is very important that you read and try to understand the document as this is where people can spot pitfalls early on that are specific to the policy. For example, a life insurance plan from the Post Office differs from a policy from LV=.

Here are some general examples we have spotted on a few policies that would mean your life insurance doesn’t pay.

[Related link: What life insurance policy is right for you? Find out here]

If you have lied

Talk to any life insurance firm and they will tell you that the number one reason for a policy not paying out is because of non-disclosure– in other words, if the client lied on the application form.

Not telling the company that you smoke, are involved in risky sports, have a terminal illness, are addicted to drugs, or even have a mental health condition could be detrimental to your loved ones when they try to make a claim.

If you commit suicide

Most life insurance policies won’t pay out if the person insured commits suicide within the first 12 months of taking out the plan, but most will after this initial period is up.

This is so insurers can guard against people obtaining large policies, and then taking their lives to get their family out of financial difficulties.

Arguably this depressing scheme is still achievable after a year on most policies, but LV= told us that in some cases suicide claims are turned down because there has been non-disclosure about the mental health of the person with the policy.

If you live longer than expected

Should you decide to take out a fixed-term level of cover and you end up outliving the policy, you will not receive anything upon your death.

So if you are 30 years old and take out a 40-year policy, then you are only covered should you die before the age of 70. A year later and your family won't receive a penny.

A lot of fixed-term plans are required to end before your 70th birthday (level life insurance and decreasing life insurance), but whole life insurance will cover you until you die.

If you have a terminal illness

Insurers consider terminal illness to mean a rapidly progressing sickness where your life expectancy is deemed to be no greater than 12 months and that has no known cure.

If you develop a terminal illness, in most cases you can get your life insurance paid out early with a percentage reduction on the lump sum (as you have not completed the term).

Sadly if you are diagnosed with a terminal illness 12 months before the end of your plan the insurer won’t pay out early, but only once you are gone.

If you live and travel outside the UK

Some policies that include critical illness cover (when you are diagnosed with an illness like cancer) may be void if you live or travel outside the EU, USA, Canada, Australia, New Zealand, the Isle of Man or the Channel Islands for more than 12 consecutive months.

If life changes and you don’t let anyone know

It is tempting to think that once you have bought life insurance you will never have to think about it again. But like all insurance you will need to update your policy as changes take place in your life.

When you get married, have children, buy a house, get a job, move to a better house (with a bigger mortgage) or get a better job (with more income) your level of cover should change and you will need to increase the sum assured.

If you don’t update the terms of the policy, you could be under-insured and even if your family get a payout it is unlikely to cover what you wanted it to and what they need.

You can use our life insurance calculator to work out how much cover you need.

[Related link: See how much life insurance would cost you]