When a life insurance claim is filed, most families assume the only real question is whether the death is covered. They expect a review of the cause of death, the policy language, and the beneficiary designation. What they do not expect is a letter stating that coverage never existed in the first place.
Yet that is exactly what happens in what insurers call an “eligibility audit.”
After the insured dies, the plan administrator or insurance company goes back and reviews whether the person was actually eligible for coverage under the terms of the plan. If they conclude the insured was not eligible, they deny the claim on the ground that there was never valid coverage to begin with.
For grieving families, this feels like the rules changed after the game ended.
Here is how these denials typically arise and what actually matters in challenging them.
What Is an Eligibility Audit
An eligibility audit is a post claim review of whether the insured met the requirements to be covered under a group life insurance plan. These cases most often involve employer sponsored policies, including plans governed by ERISA.
Instead of disputing the cause of death, the insurer focuses on technical eligibility requirements such as:
• Minimum hours worked
• Employment classification
• Active at work requirements
• Effective date of coverage
• Leave of absence status
• Premium deductions and payroll records
If the insurer believes one of these requirements was not satisfied, it may declare the policy void from the start.
Common Scenarios Where Coverage Is Challenged
Reduced Work Hours Before Death
Many group policies require employees to work a minimum number of hours per week, often 30 or more. If an employee’s hours dropped below that threshold before death due to illness or restructuring, the insurer may argue that eligibility ended.
Families are often shocked to learn that even a temporary reduction in hours can trigger a retroactive denial.
Leave of Absence or Medical Leave
Coverage during leave is frequently limited. Some plans continue coverage during FMLA leave but not during other types of unpaid leave. Others require premium payments during the leave period.
If payroll records show no deductions or a change in employment status, insurers may claim coverage lapsed months before death.
Failure to Meet the “Active at Work” Requirement
Many policies require the employee to be actively working on the date coverage became effective. If the employee enrolled during open enrollment but was out sick on the effective date, the insurer may assert that coverage never took effect.
This is one of the most common technical denials in employer sponsored life insurance cases.
Misclassification of Employment Status
Independent contractor versus employee disputes can also lead to eligibility denials. If the company treated someone as eligible and deducted premiums, but later reclassified them, the insurer may argue that the individual was never part of the eligible class.
Premiums Were Deducted, but Coverage Is Denied
One of the most frustrating situations is when premiums were consistently deducted from the employee’s paycheck, yet the insurer still claims the person was ineligible.
Families understandably ask: if premiums were taken, how can coverage not exist?
Insurers often respond that payroll errors do not create coverage if eligibility requirements were not satisfied. Whether that argument holds up depends on the plan language and the governing law.
Why These Denials Feel So Unfair
From a family’s perspective, everything looked valid:
The employee enrolled.
Premiums were deducted.
Benefit confirmations were issued.
No one raised a problem while the insured was alive.
Only after a claim is filed does the insurer comb through records to find a technical basis to deny.
Courts have recognized that these cases raise serious fairness concerns, particularly when the employer and insurer controlled the enrollment process and payroll deductions.
In some cases, doctrines such as waiver or estoppel may come into play, especially where the insured reasonably relied on representations of coverage. In ERISA governed plans, the legal standards can be more restrictive, which makes building a strong administrative record critical.
Documents That Matter in an Eligibility Dispute
If an insurer claims coverage never existed, the following documents are often central:
• The full plan document and summary plan description
• Enrollment forms and confirmation statements
• Payroll records showing hours worked
• Payroll deductions for premiums
• Employer communications about coverage
• Leave records and HR status reports
The plan document controls, but inconsistencies between employer records and insurer arguments can significantly impact the outcome.
The Role of ERISA in Employer Sponsored Plans
Many employer sponsored life insurance policies are governed by the federal law known as ERISA. Under ERISA, courts often review the insurer’s decision under a deferential standard if the plan grants discretionary authority.
That means the appeal process becomes extremely important. Families typically have only one administrative appeal before the record closes. Any evidence not submitted during the appeal may be excluded later in court.
Because eligibility audits rely heavily on internal records and plan interpretation, developing the factual record during the appeal can make or break the case.
Individual Policies Are Different
Retroactive eligibility denials are less common in individually purchased life insurance policies. In those cases, disputes more often involve alleged misrepresentations on the application rather than employment based eligibility.
Still, insurers sometimes attempt to rescind individual policies by arguing that coverage never properly went into force. The analysis depends heavily on the policy’s effective date provisions and payment history.
What Families Should Do After an Eligibility Based Denial
If you receive a denial stating that coverage never existed, do not assume the insurer is correct.
Start by requesting the complete claim file and all plan documents. Review the stated reason for denial carefully. Identify the specific eligibility requirement the insurer claims was not met.
It is also critical to confirm:
• Whether premiums were deducted
• Whether the employer represented that coverage was in force
• Whether the insured received benefit statements
• Whether similar employees were treated differently
Eligibility cases often turn on detailed factual questions. A denial that appears final may rest on incomplete or incorrect information.
The Bottom Line
An eligibility audit after death can transform what seemed like a straightforward life insurance claim into a technical battle over employment status, hours worked, or paperwork details.
When insurers retroactively claim coverage never existed, the issue is rarely as simple as the denial letter suggests. The controlling documents, the employer’s conduct, and the governing law all matter.
For families who depended on that policy, the stakes are significant. A careful review of the plan terms and the underlying employment records is often the first step toward challenging a denial that should never have been issued.