Dear Penny: Do My Kids Get My Life Insurance if I Didn’t Disclose Terminal Illness?

A mother is comforted by her two adult sons while sitting down.
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Dear Penny,

I have a life insurance policy worth $1.5 million with my two kids as beneficiaries. I have a degenerative disease called Spinocerebellar Ataxia Type One, which was diagnosed one year before I bought the policy. It’s a rare condition that is not well-known. 

The disease will have me bedridden at the end of it. When I pass away, will the company pay the death benefit? Or hold it back as I passed away due to a degenerative disease? As far as I remember, there was no place to indicate Ataxia on the signup form. There were questions about multiple sclerosis, which is better known. 

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

-Desperate Single Mom

Dear Desperate,

I can’t promise you with 100% certainty that your policy will pay the death benefit. But in all likelihood, your kids will get that money without issue.

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% of the $78 billion paid out to beneficiaries in the same year.

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A denial is most likely to occur when someone dies within the two-year contestability period that’s typically in effect from the time you obtain your policy. Basically, if you die within that two-year window, the insurer can investigate your application for “material misrepresentation.”

That could include blatant falsehoods on an application, like lying about a cancer diagnosis or a drunken driving conviction, or saying you work a desk job when you really have a dangerous occupation. But material misrepresentations can also result from honest mistakes. Some people fail to mention a prescription or procedure they had years ago on the application, simply because they forgot it.

The company can deny the claim if you die during the contestability period and it finds evidence of material misinformation, even if your death had nothing to do with the information you failed to disclose. If you lied about a cancer diagnosis, then died from being struck by lightning, they could still deny your claim. The overwhelming majority of claims will still be paid out when someone dies within the contestability period. It’s just that the insurer will typically give them a bit more scrutiny.

In your case, obviously, the two-year contestability period has long since passed. 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.

“A life insurance carrier could technically deny a claim after the contestability period if they suspected the insured committed insurance fraud, or if the insured willfully provided misstatements on the application,” said Jason Veirs, president and owner of Insurance Experts Solutions Inc., a San Diego-based insurance brokerage.

Your situation is tricky. Even though the application didn’t ask specifically about your disease, it probably did include questions where you were expected to disclose any conditions not mentioned.

Most applications include detailed questions like, “Have you ever been treated or told by a member of the medical profession that you have high blood pressure, heart issues or joint issues?” or catch-all questions like, “Other than what you have already disclosed, in the last five years, have you consulted or been treated by another practitioner or physician, or received any other treatment which wasn’t disclosed?”

“Most of these questions will suss out any sort of health history on the application,” Veirs said.

Again, it would be unusual for your beneficiaries’ claim to be denied given how much time has elapsed since the policy was issued. You’ve spent years paying the premiums on this policy. It’s very likely that your kids will get your death benefit.

If you’re OK with those odds, you can keep paying the premiums on the policy, knowing your money probably isn’t going to waste. It’s especially important, though, that you don’t let the policy lapse. If the policy lapses and you reinstate it, you’d trigger a new two-year contestability window.

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

My last piece of advice isn’t for you, Letter Writer, since we can’t turn back time. But for any readers who are shopping for a life insurance policy: It may be tempting to not disclose a diagnosis on your application, particularly if you’re confused about whether it’s necessary. But it’s in your best interest to err on the side of disclosure.

The goal of buying life insurance is to protect your family financially. Make sure you know with certainty whether the policy you’re buying will actually afford protection.

Once you finally get your finances in order, you want to keep them that way. Here are several moves to make now.

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