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Whose life insurance policy is it, anyway? p.2

The death of actor/comedian Robin Williams got a lot of people thinking about a lot of things. The connection for us was the question of suicide and life insurance benefits.

Years ago, a friend of ours took his own life, as Williams did, and the family quickly found themselves mired in problems over insurance and retirement account benefits. Still reeling from the loss of their loved one, the primary earner, they sat on hold for hours to try to figure out if they would be able to make ends meet.

Life insurance policies may not pay benefits if the insured commits suicide. It sounds harsh, but in some ways it makes sense.

For example, someone could take out a policy for $1 million on Tuesday and jump off the Golden Gate Bridge on Thursday. The insurance company would have collected just the initial premium from him; without premium income, insurance companies have no investment income. Without both premium income and investment income, insurers cannot afford to pay benefits.

Still, common sense kicks in sometimes, even with insurance companies. Barring payouts for any death ruled a suicide would not go over well with regulators, much less the public. Instead, companies opted to bar these claims for the first two years that a policy is in effect.

The limit is explained in the "suicide clause" of the policy. The policy must be in effect for two full years for the company to pay the benefit of an insured who commits suicide. The catch is that each policy carries that two-year limit.

If our friend had purchased insurance five years before his death, the suicide provision would not be triggered. If, however, he canceled that policy 18 months before his death and replaced it with a new one, the suicide provision would apply: The new policy restarted the clock on the two-year limit.

A life insurance policy could also include an incontestability clause. We will talk about that in our next post.

Source: Time, "How Life Insurance Policies Deal with Suicide," John Dorfman, Aug. 15, 2014

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