Your life insurance policy will generally pay your beneficiaries the full death benefits the moment they file a claim upon your passing.
However, certain causes of death, such as suicide, may impact a beneficiary’s eligibility for the life insurance payout. The death benefit could also be impacted if the policyholder passes away too early in the policy term.
This article will explain how life insurance suicide clauses work and how they can affect your death benefits and, therefore, your beneficiaries.
What is a Suicide Clause?
A suicide clause is a section of a life insurance policy that may limit the death benefit payout if the insurer determines the policyholder’s cause of death was suicide.
The suicide clause is meant to protect the insurer if an emotionally distressed policyholder purchases a policy and commits suicide to provide beneficiaries with a death benefit payout.
Suicide Clause Timeline
Suicide clauses take effect when you pay your first premium. However, they don’t last the entire policy term. Instead, there is usually a period of a few years where the insurer can restrict death benefit payment if a suicide occurs. Some states legally limit suicide clause length.
That said, changing your policy may impact or restart the suicide clause’s timeline.
Suicide Clause vs. Contestability Period
The contestability period is when the insurer can deny a claim if the insurer discovers the policyholder failed to disclose known health conditions or other critical information on the application. This is meant to protect the insurer if the policyholder lies about a critical health condition to secure coverage for beneficiaries.
Contestability periods often last two years, overlapping with suicide clauses. However, they separate from the suicide clause.
How Beneficiaries May Be Impacted Financially
Here’s how beneficiaries could be impacted financially based on when the policyholder passes away:
Suicide Clause
If a policyholder passes away by suicide during the suicide clause period, this can prevent beneficiaries from receiving any death benefit payout. However, the insurer may refund the policyholder’s premiums to the beneficiaries.
However, if the policyholder passes away by suicide after the clause expires, their beneficiaries are still eligible to receive the full death benefit.
Contestability Period
If the policyholder passes away during the contestability period, the insurer may scrutinize the cause of death and the policyholder’s application more closely. The insurer could potentially deny claims if it finds application inaccuracies, even if they aren’t related to the cause of death.
Alternatively, if the error is minor — such an error that would raise premiums — the insurer may reduce the death benefit payout by the amount of premiums it lost out on.
If there are no errors, the beneficiaries receive a full payout.
If the policyholder passes away after the contestability period, the insurer will usually pay out the full death benefit unless the application contains a major error that would have impacted the policy’s underwriting.
The Bottom Line
Suicide clauses and contestability periods could pose risks to your beneficiaries by letting the insurer deny claims based on the cause of death. This protects the insurer and potentially deters policyholders from committing suicide so that they instead seek the help they need.
With that in mind, the specific terms of a policy’s suicide clause and contestability period could vary by insurer. Gather and compare quotes and speak to insurers about these clauses before proceeding with a policy.
