Falsifying information on a life insurance application can come back to haunt you up to two years later or more. Learn the details about contestability.
Understanding the Life Insurance Contestability Period (2024 Guide)
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Via Secure Partner PolicyGenius
Updated:
Apr 13, 2024
The life insurance contestability period refers to the time after policy approval when an insurer can still investigate claims. In some cases, this may result in claim denial, forcing policyholders to seek legal recourse if they wish to attain coverage. In short, this contestability period is a window of opportunity for insurers to determine if any information given on the application was false or incomplete.
In this guide, we at the MarketWatch Guides team review what a contestability period is, why all top life insurance companies have one and how to ensure that you navigate it successfully.
What Is the Life Insurance Contestability Period?
The life insurance contestability period typically lasts two years from the date of policy approval. During this time, an insurer has the right to investigate any aspect of a policyholder’s health that could have been misrepresented on their application. If it finds that information was intentionally withheld or falsified by the applicant, it can deny coverage or void the contract entirely.
The purpose of the life insurance contestability period is twofold:
- It serves as a deterrent against fraud by allowing insurers to thoroughly vet applications.
- It helps insurers spot any misrepresentation and helps control the cost of insurance due to misrepresented claims.
The contestability period exists on most types of life insurance policies, including term life and permanent life insurance policies.
Why Is the Contestability Period Important?
The life insurance contestability period is an important part of the process as it allows the insurance company to investigate a beneficiary’s claim and verify its accuracy. This guarantees that the policyholder will receive a fair payout if their claim is accepted, and prevents fraudulent claims from being paid out. This also helps to keep premiums affordable for policyholders.
Additionally, the contestability period safeguards the integrity of the insurance company and ensures that it is not taken advantage of by claimants. By giving the insurer time to investigate all aspects of a claim, it can ensure that only legitimate claims will be paid out. Ultimately, this helps make sure that policies remain affordable for everyone involved.
What Happens If You Are Caught Lying on a Life Insurance Application?
If you are caught lying on a life insurance application, the consequences can be severe.
Depending on the specific details of the case, your policy could be canceled. Furthermore, insurance companies may deny future coverage for years and even initiate legal action against you if you have been dishonest about your information. If convicted of insurance fraud, you could face hefty fines and jail time in some cases. It is important to remember that any dishonest behavior in relation to a life insurance application can lead to serious repercussions that could last for years.
Common examples of dishonesty occur during the medical exam process where applicants may not share the entire truth. Or, they purposely apply for no-exam life insurance to try and hide a medical condition. If the insurer finds medical records that contradict the original information on an application, it may result in the denial of the death benefit to the beneficiary.
Misconceptions About the Contestability Period
Many people assume that the contestability period is short and it may be hard for the insurance provider to challenge them. However, the truth is that the contestability period lasts two years from the date that the policy was issued. During this time, an insurer can challenge any claims made by the policyholder if they deem them to be incorrect or invalid. On the flip side, policyholders can request a review of their policy in order to ensure that they are getting the coverage amount they need and deserve.
Another misconception about the contestability period is if the insurance company cannot find something that you didn’t disclose, there is no more recourse for the insurance company. While this is not quite as common, it does happen. Here is an example: An insured stated on the application they were a non-smoker. Twenty years later, the insured died due to lung cancer. When the insurance company investigated the claim, it found that the person was smoking before and during their application for life insurance. The result was a reduction in the claim. The insurance company essentially went back 20 years and charged the appropriate smoker rating plus interest to the policy which substantially reduced the death benefit the beneficiaries received. This is an example of material misrepresentation and caused a change that affected the insured’s loved ones in a meaningful way.
One final example of a misconception about the contestability period is that agents can manipulate information to get the client the best deal. The insurance agent has a contract with the insurance company to represent its products to you, so they have an obligation to tell the truth.
If you tell the truth on your application, you likely have nothing to worry about.
How To Navigate the Contestability Period Successfully
The key to navigating the contestability period successfully depends on providing accurate information and disclosing all relevant information during the application process. This includes providing detailed answers about any pre-existing medical history or lifestyle factors which could affect your risk level, such as smoking cigarettes or participating in extreme sports or activities like skydiving. It is also important to make sure that any additional paperwork requested by the insurer is completed fully and returned promptly so that their investigation process can continue without delay.
Working with an experienced agent or broker who understands how life insurance works can also be helpful when navigating the contestability period. Not only will they help you understand what information needs to be disclosed on your application form, but they will also provide advice on how best to present yourself for underwriting approval in order to maximize your chances of success at claim time. Ultimately, having a professional on your side to help guide you through the process can make all the difference when it comes to ensuring your life insurance policy is fully protected.
Avoiding Policy Lapses
If you want to avoid lapsing your life insurance policy, it is important to carefully plan your finances.
Before you start the application process, do an analysis of your finances to determine how much you can realistically devote to premiums and other payments. Additionally, it is wise to keep track of payment deadlines so you don’t miss any payments or fail to renew the policy on time. If you’re able, setting up an automatic premium draft from your bank account is the best way to keep from missing a payment. If you ever have trouble making a premium payment, contact your life insurance company immediately so it can help you find solutions.
If you are unable to make your premium payment, you typically will have a 30-day grace period. The grace period is the time the insurance company will allow you to make up the payment before it cancels the policy. If canceled, you will have you go through a reinstatement process, which may require a repeat of the underwriting process. These events may cause the contestability period to start all over again.
Contestability Period vs. Incontestability Clause
The contestability period and the incontestability clause are two important features of a life insurance policy. The contestability period is typically two years from the date of application, during which time the insurance company has the right to investigate any information on the application that may be deemed inaccurate or fraudulent. If any inaccuracies or fraud are discovered, it can deny coverage or rescind the policy.
An incontestable clause states that after a policy has been in force for a certain amount of time (usually two years), it cannot be challenged by an insurer on any grounds unless there is definite proof of fraud at that time. Once an insurance policy becomes incontestable, even if a material misrepresentation was made when applying for coverage, it cannot be challenged.
Not every life insurance policy has an incontestability clause that removes a challenge to a claim, in whole or in part, if fraud is discovered.
Suicide Clause and Contestability Periods
The suicide clause typically states that if an insured individual takes their own life within a certain period of time after signing up for the policy, then the beneficiaries will not receive any benefits from the policy. This clause is usually in place to prevent fraud as it prevents anyone from taking out a life insurance policy solely to benefit their beneficiaries in the event of suicide.
In most states, this clause has a two-year window and overlaps with the contestability period, during which insurers can investigate any misrepresentations or inaccuracies on a policyholder’s application. This means that even if all relevant information was accurately disclosed at the time of application, if an insured party commits suicide within this two-year period, then the insurer can deny the claim. If a suicide occurs outside of this timeframe, it will be treated like any other cause of death.
The Bottom Line
Understanding the two-year contestability period is essential for anyone looking into obtaining life insurance coverage. It is important for applicants to disclose all relevant medical information, as well as facts about their lifestyle, accurately and honestly to avoid potential claim denials down the road during this two-year window after policy approval.
Whether you choose an affordable term policy or a comprehensive whole life policy, there will be a contestability period. An experienced licensed life insurance agent or broker can be helpful in navigating this period successfully. Ultimately, taking these extra steps will help ensure that your life insurance policy is properly protected, leaving you and your family with peace of mind.
Frequently Asked Questions
All life insurance has a contestability period. The duration of the contestability period is controlled at the state level, so there is a chance it could change.
Once your policy is issued, the contestability period begins. It also re-starts if you lapse your policy and then reinstate it back.
It is not very common to have a life insurance claim denied after the contestability period, but if you have misrepresented yourself to the insurance company, it is possible. If your life insurance policy has an incontestability clause, this clause typically removes the ability for an insurance company to deny a claim.
No. Contestability is not intended to punish policyholders for errors that can be easily rectified. Its purpose is to identify individuals who intentionally provide incorrect information to avoid higher premiums. When purchasing your policy, it is crucial to be open and forthcoming to guarantee that your loved ones can receive the full death benefit upon your passing.