What You Should Know About Life Insurance Contestability Period?

Checks and balances are common with life insurance policies to protect the insured and the insurance company. A contestability period is the time between the issuance of a life policy and a claim when an insurance company can contest a policy claim. However, there are limits on the time many life insurance companies must abide by.

What is the life insurance contestability period?

A life insurance contestability period is a period after a policy is issued when a life insurance company can contest a claim. The life insurance company can contest the claim by investigating whether any information was fabricated or withheld during the application process. The contestability period often depends on the life insurance company; however, it is typically two years.

An example of the contestability period would be if the insured died in a skydiving accident two months after purchasing a policy but failed to list sky diving as a hobby on the application.

The insured is responsible for being upfront about their career, medical history, and dangerous hobbies during the medical exam process. Withholding any pertinent information can result in the denial of benefits.

Why is the contestability period important in life insurance?

The contestability period is ultimately important not only for the insurance company but assists the insured as well. If policies that were discovered to be fraudulent weren't canceled, companies would have to increase the cost of insurance policies astronomically high just to remain in business. These checks and balances serve to promote fairness and truthfulness on behalf of both parties. While terms like contestability period may seem concerning at first, this period exists ultimately for the benefit of both parties.

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What if I lie on a life insurance application?

Contestable period life insurance policies protect insurance companies from those who aren't truthful on an application. The insurance company can deny a claim on the policy even if the insured's death has no relation to what they weren't honest about in the application process. For example, suppose the insured is a smoker and didn't disclose it on the application and dies in a car accident. In that case, the beneficiaries may not be eligible to collect the benefits.

A life insurance company can investigate details that might have been fabricated if the insured dies after the two-year contestability clause has expired. The expiration doesn't necessarily mean the company can no longer investigate potential fraud. Leaving out significant information on a life insurance application carries inherent risks that could reduce or reject a payout.

What is the incontestability clause?

Part of the checks and balances of a life insurance policy involves protection and counterbalances that favor the insured. The incontestability clause is placed in many policies to ensure the insureds are protected as well. The specifics differ for each state, but in general, the incontestability clause helps to prevent insurance companies from ending a policy because of accidental misrepresentation of facts by the insured when applying for a life policy.

This clause is put in place not because insurance companies can never void an insurance policy, as there are times when fraud and intentional misrepresentation necessitate this, but rather because errors can happen during the application process. There is an understanding that mistakes can occur and details can be forgotten by the insured that are relevant to the policy. The incontestability clause works to prevent insureds from being punished due to an oversight.

What happens when the incontestability period is over?

The incontestability clause protects insureds by providing a period when insurance companies can contest any inaccurate information provided during the application process. This has been referred to previously as the contestability period. As mentioned, the period typically lasts two years and starts when the policy is issued. Again, this does not mean that if fraud happens to be discovered later, insurance companies cannot contest.

How does the incontestability clause benefit the insured?

There are several ways the incontestability clause works on behalf of the insured. We have listed the most common below, but the insured will need to review the clause for their policy before making any decisions, as these can vary from state to state:

In many states, if the age or gender of the insured is misrepresented when applying for a policy, the insurance company cannot end the policy but subtract the premiums the insured would have paid had those factors been correct. These are typically subtracted from the death benefit.

Some states allow for a contestability period, allowing the insurance company to take time (typically two years) to investigate claims made within the period after the policy is issued. This prevents insureds from buying insurance while terminally ill and the beneficiary from collecting a benefit.

It should be noted that an incontestability clause is for accidental errors in the application process and not for attempted insurance fraud on behalf of the insured.