How Does Suicide Affect Life Insurance?

The point of a life insurance policy is to ensure that a policy’s beneficiaries – usually family and close friends – receive a suitable financial settlement in the event of the policy-holder’s death.

This is usually taken to mean an accidental or natural death. Suicide is not usually considered one of the options but of course the potential beneficiaries will be left in just as severe financial difficulty if the policy-holder takes their own life as they would be via death through natural causes.

As a result, there are means that exist in life insurance policies to ensure that beneficiaries are protected in the tragic event of a suicide. These have to be means that also protect the life insurance companies though.

Life insurance policies contain a Suicide Clause – sometimes called an incontestable clause – that makes clear what will become of the policy in the event of the holder taking their own life. It is standard practice in such clauses to consider the time of death and to specify that if a policy holder takes their own life within two years of taking out life insurance, then no benefits are to be paid out. However, because a number of premiums will have been paid into the policy, these will be repaid to the beneficiaries. In most cases some sort of payment will take place if a suicide occurs after two years – or the named period in the Suicide Clause – even if it is not to all of the named beneficiaries.

The Suicide Clause gives the beneficiaries a clear idea of what restrictions will be place upon their likelihood of receiving a payout from the life insurance policy, but it is also there to give the life insurance company protection from Adverse Selection –the practice of deliberately obtaining a policy with the intent of planning one’s death and allowing a beneficiary to collect the cash.

Adverse Selection is also used to refer to the tendency of those people who have high-risk lifestyles, chronic health problems or who are commencing dangerous or unhealthy jobs – such as those underground or in a war zone – to obtain significant levels of life insurance. To try to mitigate the financial consequences of such actions, life insurance companies increase premiums and offer only limited coverage for such people.

To be effective, life insurance has to be profitable for both the policy-holder and the life insurance companies. The Suicide Clause attempts to strike this balance.

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