5 common reasons life insurance won't pay out

If you've ever gone through the nightmare of having an insurance claim denied you'd know it's something you definitely want to avoid.

Insurance is supposed to give us peace of mind that we're looked after in a crisis, not a slap in the face!

But unfortunately that's what some Australians go through.

So what if they dispute it?

A report in 2016 found that the average length of a claims investigation is 18 months.

Not a comfortable waiting period when you need a payout now.

In that same year, around 8% of life insurance claims were denied.

Luckily, you can take steps to avoid being part of this unlucky few.

Know about (and avoid) these simple mistakes so that you can have the best shot at protecting your loved ones if/when the time comes.

After all, none of us get out of here alive!

We've compiled a list of some of the most common reasons life insurance claims are denied and how to prevent this from becoming your story too.

1) The policy lapsed due to non-payment before the insured's death

This is an obvious one, but it catches a surprising amount of people off-guard.

Most of us are pretty good at keeping our bills in order, but it's important to remember that even just one missed payment at the wrong time can result in years of your paid premiums going out the window.

The important thing about insurance is not how many years you've been paying your premiums.

It's that you pay on time, every time, without fail.

Whether you have a weekly, fortnightly or monthly payment frequency, stay up to date so you know you're covered.

What you can do:

Set up a direct debit from an account that you knoinsurw will always have money.

And with most policies you can choose when the money comes out, so if you get paid monthly then have the payment come out the day after.

2) The policyholders' cause of death wasn't covered by the policy

Some people are so eager to get coverage that they buy any old policy that comes at a decent price without ever really reading their product disclosure statement (PDS).

But at the end of the day, this is exactly what you're buying!

You need to know about any exclusions, so that you can set up additional insurance elsewhere or potentially change insurance providers altogether.

Many families are often surprised to learn that their loved one's death was not covered due to their policy not covering their particular cause of death.

Common exclusions include deaths caused by mental illness, drugs or alcohol or any pre-existing conditions.

In many cases, death in a foreign country where the Australian government has issued a travel warning is not covered.

What you can do:

Read your PDS! And swap and compare policies.

Yes, your policy might only cost you peanuts, but it's worth nothing if it doesn't pay out.

Not all policies are alike, and some insurers may provide you more coverage than others.

It's worth doing the research and knowing your policy back to front.

That way, nothing will be a nasty surprise for your family if you happen to pass away from uninsurable reasons.

3) The cause of death was suicide and the policy had been in force for less than one year

Mental health is a real and growing issue for Australians and the insurance industry.

Many well-meaning policyholders who take out insurance before committing suicide may not know that they are leaving their families without.

In some cases, suicide is covered, but rarely within the first year after setting the policy in force.

Additionally, if during underwriting the insured disclosed any mental health conditions, it's highly likely they won't be covered for suicide.

What you can do:

Whether you've been diagnosed with a mental health condition or not, find out if there are any related exclusions on your policy.

It's important for you and your family to know.

And never take out a policy if you're planning on harming yourself or another.

It's highly unlikely there will be a payout.

But more importantly, there are resources to help if you or a loved one is in need.

In times of immediate crisis, insurance should be the last thing on your mind.

Instead, get in contact with any of the following amazing resources:

• SANE Australia (people living with a mental illness) -- call 1800 18 7263.

• beyondblue (anyone feeling depressed or anxious) -- call 1300 22 4636 or chat online.

• Black Dog Institute (people affected by mood disorders) -- online help.

• Lifeline (anyone having a personal crisis) -- call 13 11 14 or chat online.

4) The insured did not disclose a condition during the underwriting process that was later connected to their death

This is perhaps the most common reason for a life insurance claim getting denied.

Underwriting can be a lengthy and complicated process, and it can feel at times like the questions are purposefully unclear or that you're not getting a transparent overview of what your policy covers.

What you can do:

Ask your insurance provider about how your past or current exclusions will impact on your policy.

They are obliged to let you know the truth.

If they do not, then a rejected claim could potentially be repealed on account of the provider's non-disclosure.

On many occasions, this has resulted in a family eventually receiving a much-delayed payout.

5) The insured forgot to add on their desired extras

Daytime television runs a lot of life insurance commercials, so much so that it can be hard to keep up with all the different policies out there.

When you eventually sign up, you might assume that your policy works the same way as what you saw on the telly, that it will provide an instant funeral cover payout and even feature added Total and Permanent Disability (TPD) benefits.

But where one insurance company provides, another may not.

Again, all insurance policies are not built the same way.

It pays to figure out what exactly it is you're looking for, so you can request certain features at time of purchase.

You may be pleasantly surprised to discover that most insurers are willing to tailor their policies to your needs, but you'll never know if you don't ask.

What you can do:

It's not just about your budget and what you can afford. It's about what you and your family really need.

Avoid being over-insured or worse -- underinsured, by having an insurance broker help you to assess your individual situation.

That way, you can identify the best policy for you and have full peace of mind that you're well protected.

Matthew Lang is the general manager of life insurance at Compare Club. Matthew leads a team of dedicated professionals who are passionate about helping individuals and families make informed decisions about their life insurance needs. Whether it's finding the right coverage for your specific circumstances, comparing policies, or optimizing your existing policy, Matthew and his team are here to provide expert guidance and support.

Meet our life insurance expert, Matthew Lang

Matthew's top life insurance tips

• 1

  Identify what you want out of life insurance before you buy. Knowing the purpose of your life cover will help you choose a policy that meets your needs.

• 2

  It's easy to assume that the sole purpose of life cover is to leave money behind for your family, but there's more to it than that.

• 3

  Life insurers like those on our panel pay an average of 97% of claims in full.

• 4

  There are different types of life insurance, including term life insurance, income protection, trauma cover and total and permanent disability cover.