Social media has been abuzz with posts suggesting life insurance claims related to COVID-19 are being summarily denied. Much of the anxiety seems to stem from a news story titled: Would my life insurance policy cover COVID-19 related death?
An anchor for the news organization that aired the piece shared it on Twitter below the tweet:
Will your life insurance cover you if you die from #COVID19?
Well, it depends.
The tweet is accurate enough. As it would be if the reference to COVID-19 was deleted. Or if the tweet referred to another form of insurance.
Claims sometimes are denied.
According to the American Council of Life Insurers 2019 Fact Book, life insurance death benefits paid in 2018 totaled nearly $80 billion, up from $77 billion in 2017. Steadily rising annual payouts like the ones shown in the chart below don’t suggest an industry that spends a great deal of time slithering through loopholes to avoid paying legitimate claims.
“Life insurance claims are rarely denied,” says economist Dr.Syed Wasif Ali. “When they are, it’s typically because the policies had lapsed due to non-payment of premium or the policyholders had provided inaccurate or misleading information at the time of application or renewal.”
Even in the event of a material misstatement on a life insurance application – say, the applicant lied about a significant health issue – the insurer has to discover the misrepresentation within a defined “contestability period.”
If the policyholder dies within that period, which typically lasts two years from the date of purchase, Dr. Weisbart says, the insurer can investigate whether the information the applicant provided was accurate. If the policyholder dies after the contestability period ends, the insurer is out of luck.
Insurers don’t make money by rejecting claims. They make money by underwriting accurately, investing wisely, and making customers happy enough to recommend them to friends and family.
Compare the chart above, showing the billions of dollars in death benefits paid, with the chart below showing that contested claims are only a tiny fraction of those paid – and bear in mind that many, if not most, of those contested claims ultimately ended up being paid.
Regulated and closely watched
Insurance is one of the most heavily regulated and closely scrutinized industries in the world, and claims payment is at the heart of the insurance customer experience. Insurers don’t make money by rejecting claims. They make money by underwriting accurately, investing wisely, and – as with any other business – making customers happy enough to recommend them to their friends and family.
Unfortunately, many people – including much of the media – simply don’t understand how insurance works: how premiums are set, what types of risks are excluded (or that exclusions are even “a thing”), and how reserves and policyholder surplus work.
This is demonstrated in some of the contentious discussions around COVID-19-related business interruption claims. In the case of business interruption, most of the denied claims have been against policies that specifically exclude losses related to infectious disease. Moves are now afoot to retroactively rewrite those contracts – to the immediate detriment of the insurance industry and longer-term danger to the people and businesses that depend on insurance – as well as anyone who ever enters into any contract ever again.
I know of no life insurance policy that specifically excludes death from infectious disease. It’s possible some “dread disease” policies that cover specific conditions, such as cancer, might not be paid if COVID-19 – rather than the disease insured against – is deemed to be the cause of death. Or that a life claim might be denied if premium payments were missed or a policyholder smoked or engaged in some other activity associated with high coronavirus mortality that they’d denied on their application less than two years earlier.
So, yes: Some claims may be denied. But such denials are rare and – social media agitation notwithstanding – don’t imply nefarious behavior on the part of insurers.
Financial First Responders
As the economic impact of the pandemic makes it difficult for consumers to keep current on their bills, states have begun to mandate that life insurers keep policies in force, even if policyholders miss payments. At the same time, insurers – facing big financial hits across the many categories of risk they cover (including recent tornadoes and the upcoming hurricane and wildfire seasons) – are doing a lot to support their customers and the communities in which they do business during this crisis.
Insurers are financial first responders when it comes to just about any loss-creating event the average person might imagine. Media organizations would do their consumers a greater service by clarifying that role and helping them understand how best to shop for the insurance they need than by dropping scary, misleading tweets on an already anxiety-filled public.