Life Insurance Contestability Period

What is a Contestability Period?

Buying life insurance is far from being the most exciting thing you can do. What is even worse, though, is when the insurer refuses to pay a claim. A contestability period is the time allowed for the carrier to contest the claim’s validity if they find material misrepresentation on the application; the period is for two years after the coverage was issued. After the two years, the company can no longer dispute the claim and must pay the death benefit to beneficiaries. In this post, I will look into the fine print of the contestability period and how this can affect the policyholder.

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Contestability Period

The contestability period was created to protect both parties, the insurer and the insured. A contract demands that both parties function under the obligation of good faith. The insured expect the carrier to pay the death benefit to its designated beneficiary, and the insurance company demands the insured to be honest when applying for coverage.

If the insured lies on the application to obtain better prices, the carrier can’t accurately determine the risk the insured poses, and therefore might issue a coverage that should have never been approved or sell coverage at a lower cost as opposed to the higher rates.

Hence, the two-year contestability period exists so carriers can discourage and prevent much of the deception and fraud. If not, they will dig their bankruptcy hole.

On the other hand, it protects the insured because the insurance companies have only two years in which they have the right to contest claims. Imagine if they come twenty years after you bought the policy and deny claims.

What Happens After the Two-Year Contestability Period?

After the contestability period ends, the coverage enters the incontestable period which prevents the insurance companies from denying claims due to a misstatement by the insured. It’s worth noting that fraud has no time limit. If the carrier determines such an act, they can rescind the policy and return your beneficiaries the total paid premiums instead of the death benefit.

Why Doesn’t the Carrier Investigate Before Issuing a Policy?

This is a valid argument, especially in today’s online environment in which many individuals can buy no-exam life insurance online by answering a few health questions. There is no exam to be administered by a third-party nurse, so the underwriter can’t examine any blood or urine samples (which might reveal abnormalities).

Ordering medical records are the exception and not the norm when issuing coverage. To say the least, the underwriter has limited data to make an informed decision whether to approve or deny coverage. My question remains. Why don’t they investigate more deeply up front and bypass the scrutiny in the future?

They can avoid all the lying and cheating and can issue policies at the right amount after doing all the investigational work. If they don’t do that, it seems like a perfect opportunity to misrepresent smoking habits or being overweight, for instance. It boils down to two critical determinants: cost and speed.

If they had to investigate each applicant by carrying an exam (which most coverages do have), ordering medical records, or sending a physician to perform a routine checkup (which I exaggerate), the process of issuing coverage would take months instead of weeks. Speed and cost are of paramount interest for both the carrier and the insured. The insurer isn’t being reckless. They still use the Medical Information Bureau (MIB) and other public sources to validate information about you, along with a recorded phone interview. That data can assist them in creating a case if there is an investigation into the cause of death during the first two years.

Post-Claims Underwriting (The After-Effect Investigation)

The insurance companies believe that two years is a satisfactory period to discover misrepresentations or frauds. In other words, if something has to go down, they will figure this out based on the cause of death in connection to the answers on the application, a recorded phone interview, or doctor records.

This rigorous process is called post-claims underwriting, and its objective is to find a way to rescind the policy legitimately, instead of paying the claim. Don’t get me wrong. They don’t do this on every policy, only if death occurs during the contestability period. Now, when a loss is on the line (paying millions in death benefit), they have the time and the resources to go over every tiny point on the application to see if they can find inconsistencies.

The cause of death will warrant a post-claim investigation. Let’s look at a few examples:

• If you didn’t mention that you are an avid rock climber and died as a result of a mountain climb.
• If you said that you are a non-smoker but died a year after buying the policy from lung cancer.
• If you said that you don’t suffer from hypertension but later died from a heart attack.

Takeaway: The cause of death in the first two years is the cause for an investigation. If you died as a result of a car accident, they typically will not have a reason to look into your medical history and find a reason not to pay out.

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What If the Insurance Company Finds Material Misrepresentation?

• If they find a misrepresentation that could have led to a different premium amount, they will subtract it from the death benefit amount and pay the rest to the beneficiary. For instance, if they found out that the insured was 40 and not 34 as he claimed to be, they will charge the difference of premium as related to the age.
• If they find a mistake that could have led to a denial of coverage, they will return the total paid in premiums to the beneficiary and deny the claim. For instance, the insured didn’t disclose he had cancer and died six months after buying the policy.

What If the Insurance Company Approves a Claim?

The good news is that your beneficiaries will get paid the full death benefit plus interest. The interest factor is to cover any delay time during the investigation. Keep in mind that most investigations are not lengthy and denied claims are rare and not the norm.

Don’t Confuse Suicide with the Contestability Period

Although the suicide and contestability are two different clauses, most are still confused by it. Every life insurance policy has a suicide clause which will not pay the death benefit if the insured commits suicide within two years of taking out the policy. It only applies to the first two years.

After that, the carrier must pay the claim if the insured commits suicide. The only way I can see the connection between the two is if the suicide was in the first two years, so the carrier can utilize the contestability clause (ability to investigate in the first two years) and therefore deny the claim.

Case Studies: Significance of the Life Insurance Contestability Period

Case Study 1: John’s Unexpected Passing

John, a 35-year-old father of two, decided to purchase a term life insurance policy to protect his family’s financial future. He completed the application honestly, disclosing his medical history and lifestyle choices. Unfortunately, just nine months after purchasing the policy, John passed away in a tragic accident.

During the contestability period, the insurance company diligently investigated the claim, reviewed John’s application, and confirmed the accuracy of the information provided. As everything was in order, the insurer promptly paid out the death benefit to John’s beneficiaries, providing them with the financial support they needed during a difficult time.

Case Study 2: Emma’s Misrepresentation

Emma, a 40-year-old businesswoman, sought to secure a life insurance policy that would cover her substantial debts and provide for her family after her passing. Fearing higher premiums due to her smoking habit, she omitted this information from her application, hoping to secure a lower rate.

Tragically, Emma passed away due to a heart attack only six months after purchasing the policy. During the contestability period, the insurance company conducted a thorough investigation and discovered Emma’s misrepresentation. As a result, the insurer denied the claim, returning only the total premiums paid to Emma’s beneficiaries.

Case Study 3: Michael’s Suicide

Michael, a 28-year-old struggling with depression, decided to purchase a life insurance policy to protect his family financially. He disclosed his medical history truthfully, including his mental health condition, which resulted in slightly higher premiums.

Sadly, Michael committed suicide just ten months after obtaining the policy. As the suicide occurred within the two-year contestability period, the insurance company conducted an investigation to rule out any potential misrepresentations. Finding everything in order, the insurer paid the full death benefit to Michael’s beneficiaries, honoring the policy’s terms.

Case Study 4: The Underwriter’s Challenge

Lisa, a 50-year-old individual seeking life insurance, was thrilled to find a no-exam life insurance policy that offered quick coverage. She applied for the policy online, providing the necessary information without undergoing any medical exams or lab tests.

One year later, Lisa unexpectedly passed away from a heart-related condition. During the contestability period, the insurance company faced a challenge: as they had not conducted any medical examinations or ordered medical records, they had limited data to assess Lisa’s health accurately.

Despite the challenge, the insurer diligently investigated public sources and conducted a recorded phone interview. Ultimately, they found the cause of death aligned with the information provided during the application process, leading to a successful payout to Lisa’s beneficiaries.

Case Study 5: The Incontestable Period Relief

After the two-year contestability period ended, Emily, a 60-year-old retiree, felt relieved knowing her policy had entered the incontestable period. This meant the insurance company could no longer contest claims based on any misrepresentations or non-disclosures during the application process.

During the incontestable period, Emily faced an unfortunate diagnosis of a terminal illness. Thanks to her honesty during the application process, the insurance company couldn’t deny the claim or rescind the policy. Emily’s beneficiaries received the full death benefit, providing financial support during her final days and afterward.

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Bottom Line

Insurance companies must exercise their full duty and investigate the cause of death for the first two years. If not, they will find themselves in a financial hole using the bankruptcy free card. The field must be equal between the two parties: you, the client, wouldn’t buy a policy from a company who wouldn’t honor your death by paying your claim, and the insurance company wouldn’t want to insure someone who shouldn’t have been warranted coverage in the first place. It makes sense.

Lastly, our parents taught us to be honest, although I don’t think they had a life insurance contestability clause in mind. They probably meant you would experience less trouble if you tell the truth. Be honest when you fill out your life insurance application, and you can sleep better at night. Even if you pass away during the first two years, the carrier will pay your claim because there were no cheating, lying, or misrepresentations which otherwise could have led to denial.

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