The constestability period of a life insurance policy is a short window in which the insurance company can investigate and deny claims. For most states the period is two years while it’s one year in others. The period begins on the policy effective date. If you die withing the contestability period, the insurance company can investigate whether all the information on your application was accurate. The company can deny paying the claim if you lied – even if the cause of death has nothing to do with the misrepresentation on your application.
The contestability period became an issue in the mid 19th century. States passed laws to protect clients who made mistakes on their applications so that companies couldn’t refuse to pay the benefits. Life insurers included a clause in their policies saying that they could only contest claims during the contestability period. According to an article on Nasdaq.com below are the seven things that you need to know about the contestability period:
1. You put your loved ones at risk if you life on your application –Don’t lie to get a lower rate. If you lie or withhold information the company can deny your claim, making it difficult for your family.
2. The insurance company still has to honor the contract if you die during the contestability period – The company can investigate the claim during the contestability period to make sure that they made the right underwriting decision and had accurate information. As long as everything is in order they still have to pay the claim. The insurer has to pay no matter how soon you die after the policy goes into effect, even if you die in a car crash an hour later.
3. The life insurance company could pay even if the application was wrong – If the investigation finds that information was incorrect, the insurer has a couple of options. They can figure out what rate class the policy should have been issued at, calculate that premium and deduct it from the death benefit. This would likely happen if you miscalculated when you quit smoking or perhaps your hazardous hobby should have been considered extreme and not recreational. The other option is to deny the claim, this decision will depend on the size of the claim and how blatant misrepresentations was.
4. You can still get in trouble if you commit fraud even if you live beyond the contestability period – Don’t assume that your clear if you live past the contestability period. Insurance companies can still take action if fraud comes to light.
5. The contestability period is different from the suicide clause – Most policies have a suicide clause but that’s completely separate from the contestability period. Under the suicide clause, if the insured commits suicide in the during the first two years they will not pay the death benefit. They will however, return the premiums paid during the period.
6. If you die during the contestability period your family may have to wait longer to collect the benefit – While life insurance companies don’t investigate every claim during the contestability period, investigations do delay the payment of the death benefit. If the investigation shows that there was no wrongdoing then the life insurance company will owe the family interest on the death benefit when the payment is made.
7. In some cases a new contestability period begins – If a policy is lapsed a new contestability period will begin when the policy is reinstated. The contestability period will also start over if you transfer the cash value of a permanent life insurance policy to a new one.
The life insurance contestability period is a short window in which insurance companies can investigate and deny claims.
The period is two years in most states and one year in others, and it begins as soon as a policy goes into effect.
If you die within the contestability period, the life insurance company can investigate whether you gave accurate information on your life insurance application. The company can deny paying the death benefit if you lied — even if the cause of death has nothing to do with misrepresentation on your application.
The contestability of life insurance policies became an issue in the mid-19 th century, says Stephen Rothschild, chair and executive committee member of the LIFE Foundation, an industry group that educates consumers about life, health and disability insurance. States passed laws to prevent life insurance companies from refusing to pay benefits just because customers made mistakes on their applications. Life insurers then included clauses in their policies saying they could not contest claims except during the contestable period.
“Insurers have to go after these cases when there’s fraud or more people would try [to cheat], and prices would increase for everyone,” Rothschild says.
Here are seven things to know about the contestability period.
1. You put your loved ones at risk if you lie on your life insurance application.
Don’t lie or withhold information to get lower rates, betting you’ll live through the contestability period, says Keith Friedman, principal of FBO Strategies, an estate and insurance firm in Stamford, Conn.
“My advice is to be honest and don’t make it difficult for your family,” he says.
2. The insurance company still has to honor the contract if you die during the contestability period.
Life insurance companies can investigate the claim during the contestability period to make sure the underwriting decision was based on accurate information. But it still has to pay the death benefit if everything is in order. The insurer has to pay up even if you die an hour after the life insurance policy goes into effect.
3. The life insurance company could pay the claim even if you got some facts wrong.
If an investigation finds you misrepresented facts on your application, the insurer has a couple of options.
It can figure out how much premium you should have been paying based on the new facts and reduce the death benefit by that amount.
That would likely happen if you simply made a mistake, such as saying you were a recreational skier when your hobby actually met the definition of extreme skiing, Friedman says. Or perhaps you miscalculated how long ago you quit smoking.
Or the insurance company can deny the claim.
The decision will depend on the size of the claim and how blatant the misrepresentation was, Rothschild says.
4. You could still get in trouble if you commit fraud and live beyond the contestability period.
Don’t think you’re free and clear if you live more than two years after the policy goes into effect. Insurance companies can still take action if fraud comes to light.
5. The contestability period is a separate issue from the suicide clause.
Almost all life insurance policies have a suicide clause. It often gets confused with the contestability period, but the two are separate issues.
Under the suicide clause, the life insurance company will not pay the death benefit and will return premiums if the insured commits suicide within the first two years of the policy. After two years, the policy will pay out even if the cause of death is suicide.
6. Your family might wait longer for the money if you die during the contestability period.
Life insurance companies don’t investigate every claim during the contestability period, Rothschild says. An insurer probably won’t look into a claim when the insured dies in a car accident, for instance. But an company likely will investigate a claim if the insured dies of a health-related cause – such as a “non-smoker” who dies from lung cancer.
The payment of the death benefit will be delayed if there’s an investigation. But if there was no wrongdoing, Rothschild notes, the insurer will owe the beneficiary interest on the death benefit once payment is made.
7. A new contestability period begins in some cases.
If your policy lapses because you didn’t pay the premium, another two-year contestability period begins if you get the policy reinstated, Rothschild says.
You’ll also face a new contestability period if you transfer the cash value of a permanent life insurance policy into a new policy, he says. Policy owners make transfers like this to get a better return on investment.
It is important to make sure that all applications are completed accurately and thoroughly to avoid issues. It’s also important to inform your clients of the contestability period written in the policy. The last thing you want to do is try to explain the contestability period to a grieving family.