You might wonder what prevents someone from buying a life insurance policy and committing suicide shortly after, thereby making the life insurer give a payout to beneficiaries.
The answer: A common policy provision often called the "suicide clause."
What to know: Suicide clause
This clause generally states that a life insurance policy won't pay out if a death is due to suicide within the first two years of the policy, but the exclusion period can vary. Instead of paying the death benefit, the insurer will refund the premiums paid to the beneficiaries. The policy will state the specific exclusion time period.
Here's an example of how a suicide clause might be worded:
We will not pay the Proceeds if the Insured dies by suicide, while sane or insane, within two years from the date coverage is issued. Instead, we will refund the premiums paid for this insurance minus any outstanding Loans. Any increase in the Face Amount will start this Suicide Exclusion provision anew, but will apply only to the amount of the increase.
The suicide clause is meant to help insurers in case a depressed and/or financially troubled person decides to buy a policy so that survivors get a quick payout.
What to know: Contestability clause
There's also a more general "contestability clause" that's standard in life insurance policies. This clause states that an insurer has the right to contest and possibly deny a claim if it believes you misrepresented anything on application, generally for two years. For example, if you forgot something.
It's important to be completely honest when you apply for life insurance. Intentional "misrepresentations" (meaning lies) can void your policy later, at any time, even beyond two years, leaving your beneficiaries without a payout.
For example, if someone states they don't use illicit drugs on a life insurance application but later dies of a drug overdose, the insurer would likely investigate. This was the case with actor Heath Ledger, who bought a $10 million life insurance and stated on the application that he did not use illicit drugs. He died seven months later of an accidental drug overdose. His insurance company contested the claim but later settled for an undisclosed amount.
Here's an example of how a contestability clause might be worded:
We have the right to contest the validity of this Policy, or the payment of the Death Benefit or any other Policy benefits, if you or any Life Insured under this Policy have incorrectly stated, misrepresented or failed to disclose a material fact in the application for insurance, or on any medical examination, or in any written or electronic statements or answers you provided as evidence of insurability.
Except in the case of fraud, we will not contest this Policy for misrepresentation after it has been in force for two (2) years during the lifetime of every Life Insured, from the later of the Coverage Date or the last date of reinstatement. If the Designated Life Insured dies during this two (2) year period, we can contest at any time.
When there is an indication of fraud, we can declare this Policy void at any time. Fraud includes but is not limited to a material misrepresentation of the smoking habit of any Life Insured. If the Policy is declared void for fraud, we will not refund the Premiums paid.
No lie for the sake of getting a better price on life insurance is worth it, considering your policy could end up void. It's better to be upfront and pay the right price, whether it's for smoking, depression or another issue.