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Life Insurance Contestability Period

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 pass away 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 were not truthful -- 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. 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 must pursue these fraudulent suspected cases or more people would try to submit false information which in turn would cause increased premiums for everyone.

Here are seven important things to know about the contestability period:

1. You put your loved ones at risk if you are not truthful on your life insurance application.

It is not worth the effort to be untruthful or withhold information to receive lower rates, betting you will live through the contestability period. The best advice is to be honest and make it comfortable for your family.

2. The insurance company must honor the contract if you pass away 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 they still must pay the death benefit if everything is in order. The insurer is obligated to pay even if you pass away one hour after the life insurance policy is effective.







3.The life insurance company could pay the claim even if you submitted wrong facts.

If an investigation finds that you misrepresented facts on your application, the insurer has a couple of options.

They can calculate how much premium you should have been paying based on the new facts and reduce the death benefit by that amount.

That would most 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. 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 clearly it was misrepresented.

4. You could still encounter trouble if you commit fraud and live beyond the contestability period.

You would not be free and clear if you live more than two years after the policy becomes effective. Insurance companies can still take action if fraud is obvious.

5. The contestability period is a separate issue from the suicide clause.

Almost all life insurance policies have a suicide clause. It is often 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 pass away during the contestability period.

Life insurance companies do not investigate every claim during the contestability period. For instance, an insurer most likely will not look into a claim when the insured dies in a car accident. However an insurer will investigate a claim if the insured dies of a health-related cause, such as a "non-smoker" who dies from lung cancer.

7. A new contestability period begins in some cases.

If your policy lapses because of non-payment of premium, another two-year contestability period begins if you request a reinstatement of the policy.

You will also face a new contestability period if you transfer the cash value of a permanent life insurance policy into a new policy. Policy owners make transfers such as this to obtain a better return on the investment.