Suicide and Its Effects Upon Life Insurance

Making sure that family and other dependents are financially protected is the overwhelming reason that people take out a life insurance policy. In the event of the policy-holder’s death, a monetary payment helps to ensure stability.

In such contracts, the death of the policy-holder is supposed to occur through either natural reasons or through an accident. Someone taking their own life would not normally be considered as falling into these categories. This, of course, is scant comfort to the beneficiaries of a policy. They are going to be left every bit as financially vulnerable in the event of a suicide as for any other reason.

Although insurance companies are aware of this and do their best to alleviate this risk, these companies also have to ensure that the means used to do so are not going to leave them vulnerable to anyone who takes out a policy to ‘benefit’ fraudulently. As a life insurance policy is a contract between two parties, it needs to avoid disadvantaging either one. There needs to be a balance struck between giving protection to the policy-holder and making financial sense to the provider.

It follows that in most life insurance policies, one will find an incontestable clause – which is usually referred to as the Suicide Clause – the job of which is to make clear the effects on the policy of the holder taking their own life. A general feature of this clause is the stipulation that there will be no payout if the policy-holder dies within the first two years of taking out life insurance. There will be some sort of payment made to the named beneficiaries, however, because any premiums paid into the policy over this period will be repaid in full.

If a policy-holder commits suicide after the two year period, most policies will make some form of payment. This may be restricted in nature and not be made to every one of the beneficiaries initially named in the policy.

Of course, such clauses present a risk to the beneficiaries but they also make sure that there is clarity concerning the consequences of a life insurance policy-holder’s suicide – which can serve to lessen the stress of bereavement. The clause also helps protect the life insurance company from the practice of Adverse Selection, whereby somebody knowingly sets out to obtain a life insurance policy with the aim of helping a beneficiary to gain financially from their death.

Another use of the term Adverse Selection describes the practice of people in high-risk occupations, such as working underground or in an area of civil unrest, to try and obtain high-yield life insurance policies. This also applies to people who have long-term health problems or unhealthy lifestyles. In order to protect their investment, life insurance companies will tend to only offer such people policies which involve higher premiums and limited coverage.

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