When does a death benefit not pay out?

Elli Schochet has only seen one life insurance contract rescinded in his 30-year career. After the insurance company had approved an application, Schochet, managing partner with Al G. Brown & Associates in Toronto, learned the client had seen a neurologist and been diagnosed with early-stage dementia prior to submitting the application, but had forgotten to disclose it.

When the client notified Schochet, he consulted the insurance company and the contract was rescinded after a determination that a death benefit wouldn’t have paid out.

Canadians often buy life insurance so their loved ones receive a death benefit after their passing. But in rare cases, mostly involving misrepresentation or outright lies, that benefit may not pay out. To prevent this from happening, advisors say they warn clients that honesty is always the best policy.

Once a life insurance policy is issued, a contestability clause takes effect. The clause allows the insurance company to cancel or void the policy if the policyholder dies within two years of the policy being issued and they made even a simple error in answering a question on the application. After two years, the policy can only be cancelled in the event of fraudulent misrepresentation.

Schochet noted that insurance companies also do not pay out a death benefit if the policyholder commits suicide in the first two years.

Kevin Williams, a financial advisor and chartered life underwriter with Sun Life Financial in Moncton, said the most common reason an insurance company wouldn’t pay out a death benefit is if the policyholder said they were a non-smoker when in fact they smoked. He estimated that life insurance policies are 30 to 40% more expensive for smokers.

Williams said he asks clients not only if they smoke but if they vape with nicotine or use nicotine in any way, such as through patches or chewing tobacco, all of which count as smoking. He also said he frequently has to dispel the myth that casual smokers — such as ones who say they only have a cigarette when drinking — can get a non-smoking policy.

If clients fail to disclose a health condition or recent diagnosis — or even that they visited a doctor or specialist and were awaiting a possible diagnosis — the insurance company could refuse to pay the death benefit if it found out, Williams said.

Life insurance applications also ask about riskier hobbies such as underwater diving, ballooning, skydiving, snowmobiling and having a pilot’s license. Not disclosing those activities could prevent the death benefit from being paid out, Williams said.

Schochet said the instinct not to disclose often comes from a fear that insurance companies will decline to cover applicants if they’re honest about pre-existing health conditions or a risk-taking lifestyle. He notes insurance companies have very high rates of claims payouts, and said he tells clients that it’s his job to advocate for them with the company.

“People unfortunately have a preconceived notion that little things are going to make a big difference in their insurability … so they won’t tell the insurance company,” Schochet said. “If you’re honest, you have nothing to worry about” in terms of the death benefit paying out.

Williams said it’s on advisors to be as thorough as possible when going through an application with a client, and not to “look at your commission cheque. Look at getting it issued properly.”

He said he tries to put as much detail as he can in an application. “Most of the time it’ll get issued — just because you have blood pressure medication, or thyroid medication, or you scuba dive doesn’t mean you can’t get life insurance.”

Sarah Brown, manager of client engagement at Al G. Brown, said when clients are replacing their policy, the company requires them to sign a form acknowledging that the suicide and contestability period are starting anew.