Insurance companies are regulated at the state rather than the federal level, and rules relating to the provisions insurance companies can include in life insurance policies vary from state to state. Generally, life insurance companies can include a provision on a life insurance contract that prevents the insurer from having to make an insurance payout if the person insured commits suicide within a certain time period immediately following the purchase of the policy.
If you buy an insurance policy on your own life, you are protecting your family from the financial problems stemming from your death. The insurance company estimates how long you should live based on your age, health, gender and other factors. You pay a larger premium if risk factors suggest that you do not have long to live and a small premium if the insurance company believes that you are in good health. If you do not die before your policy ends, the insurance company gets to keep your premiums.
If an insured person dies at an unexpectedly young age, the insurance company has to make a payout. If large numbers of people die much earlier than expected, the insurance company could go bankrupt because each insurer only keeps funds on hand to cover anticipated payouts. Mortality tables used to estimate how long people will live do not include data related to suicides because no one can accurately predict suicides. Therefore, suicides are a huge risk factor to insurance companies, and consequently state insurance regulators have allowed insurers in most states to insert suicide exclusion clauses into life insurance policies.
Typically, a suicide exclusion clause states that the insurance company does not have to payout if an insured person commits suicide within two years of the purchase of a policy. If an insured person commits suicide after two years, the insurer usually has to make a payout. Insurance regulators base the two-year rule on the premise that someone buying an insurance contract with the intention of committing suicide probably cannot manage to wait two years from a financial or mental health point of view before executing the plan.
If someone commits suicide after the suicide exclusion clause on a life insurance contract expires, the insurer can still avoid making a payout but only if the insurer can prove that the deceased person bought the insurance as part of a long-term plan to defraud the insurance company. However, proving beyond a reasonable doubt that a deceased person not only committed suicide but planned to do so for more than two years often proves difficult, and consequently insurance companies rarely prove such cases.