Standard Life Insurance Policies
Standard life insurance is any life insurance that does not have limitations on the manner of death. If the person who is insured dies during the term of the policy, the insurance company is obligated to pay the life insurance benefit. In some policies there is a double indemnity clause which will pay two times the face of the life insurance in the event of accidental death. Accidental death is defined under the terms of the policy.
There are several products sold by life insurance companies. One is an annuity in which a lump sum provided to the insurance company will be paid out in some type of periodic payment. Annuities often stop with the death of the person who bought the contract or after a specified number of years. Term life insurance is another product. It pays a set amount of money in the event of the death of the insured if he dies within a specified period of time. Whole life insurance is a third product. In a whole life policy, premiums are paid for a specific period of time (20 years). Once the policy is paid in full, it remains in effect until the death of the insured. Because the insurance company has an obligation to pay money once the policy has been paid in full, the policy has value. Under the terms and conditions of a whole life policy, loans can be made against the value of the policy.
Issues that arise under standard life insurance policies are frequently questions concerning surrender or cancellation of the policy. Because whole life policies have value, most insurance companies set up a procedure for borrowing money against that value. There is also a procedure for surrendering the policy for the cash value. Disputes over the existence of the policy are not uncommon. Once the insured or his beneficiary can establish that a policy was purchased, the general principal is that the insurance company must prove the surrender or cancellation. Complicated issues can arise if the insured fails to make his regular periodic payment on the policy. Most whole life policies have a provision for using the funds in the paid-up portion to pay continuing premium charges. When a conversion of this nature is made, the insurance company is required to notify the insured and give him the opportunity to continue with the periodic payments or surrender the policy for its cash value. We handled an unusual case where the insured had apparently outlived the record-keeping within the insurance company. When the insured was a young man, his father took out a whole life insurance policy on his behalf in 1925. That policy was fully paid up as of 1945. The insured did not die until 1999. The insurance company claimed that the policy was no longer in existence because the policy pre-dated the company’s computerized records which began in the late 1960’s. Since the insurance company had no proof that the policy had ever been surrendered or paid off, it was forced to pay the policy. Because the policy had been paid up for such a substantial period of time, it had generated interest and dividends from the profits of the insurance company for over 50 years. The ultimate payment was more than ten times the face value of the policy.
The moral of this story is not to accept the statements of the insurance company blindly. Always ask for proof of the position taken by the insurance company. Always ask that the insurance company put its position in writing. Always anticipate that your situation may result in litigation. Therefore, you want to make sure that there is a record of what has transpired. Having the insurance company put its position in writing eliminates disputes over the facts. When the facts are in writing, they are hard to dispute. The issue then shifts to how the law will be applied to the facts.
Another area where problems arise with life insurance policies is with the application for the insurance. If the insured knows he has a significant injury or illness and does not make that information known to the insurance company, the policy can be declared void for fraud. If an insurance policy is declared void by the insurer it means that the policy never existed and all premiums paid by the person who took out the policy should be refunded. For example, if you are aware you have terminal cancer, conceal that information from the insurance company, and then die within one year of filling out the application, that is fraud. If the insurance company knew about your terminal illness, it would not have written the life insurance policy. The insurance company cancels the policy in such a situation because it would not have accepted the risk.
The issue becomes much more complicated if you have an illness but don’t know it. If you do not know you have a problem, you cannot tell the insurance company about it. Insurance companies regularly request access to the medical records of the deceased individual to check on their health for the period before the death. When an insurance company finds an illness that does not appear on the application for insurance, it tends to investigate further with an eye toward the potential cancellation of the policy. Whether the insured knew or did not know is problematic, because he is not around to testify about his knowledge. A lawyer should be consulted if a question arises concerning health issues and what a deceased individual knew concerning his health when he filled out an application for insurance.
When the insured knows that he has an illness or injury that would be relevant to the insurance company and he does not divulge it, his silence is considered fraudulent. Frequently, the surviving spouse has said to us, "The insurance agent filled out the form and my husband just signed it.” Although it is relevant that the insurance agent filled out the form, that alone will not eliminate a claim of fraud by the insured. The law on this issue is that if the insurance company would not have written the policy of insurance had the information been divulged, it will be permitted to cancel the policy. The law also states that a person signing a document should read it. If the document contains false information, the person signing the document should correct it before signing it. No misstatements should be made in any application of insurance that bears your signature. Any misstatement can come back to haunt you when you or your beneficiary attempt to make a claim. Do not rely on your insurance agent who tells you "don't worry about it.” Virtually all documents filed with insurance companies in Pennsylvania contain a statement that false statements are punishable by criminal prosecution which could involve a jail sentence and/or a fine.
A standard clause in many life insurance policies provides that two years after the policy goes into effect, the insurance company cannot contest how the policy came into existence. Some incontestability clauses go so far as to say that even fraud on the part of the insurance applicant will not cause the policy to be cancelled. The language of the incontestability clause is very important. If an issue arises concerning an incontestability clause, consulting an attorney with insurance expertise is advisable.