Explaining the Two-Year Contestability Period for Life Insurance

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Image source: thebalance.com

BY: ANDREW STEWART

When I hear the word “contest” my mind immediately thinks of one person or team fighting hard against one another to prove who is better. The word “contestability” might sound a little frightening when it’s associated with your life insurance policy. “Contest” implies that there’s a winner and a loser, and nobody wants to be on the wrong end when it comes to making sure your loved ones are financially secure.

Normally when someone passes away who has life insurance, the insurer pays the policy’s beneficiaries soon after a claim is filed. The contestability period is a short window if a person dies within the first two years of having the policy. The company has the right to delay payment while it investigates the details of your medical history to make sure you didn’t misrepresent information on your application, for example, stating that you don’t smoke when, in fact, you do and have for many years. Misleading an insurance company by providing inaccurate information on your application to save on cost or to get approved for coverage is known as a material misrepresentation.

I believe it’s important to first define what material misrepresentation means in the context of law. A material misrepresentation is intentionally hiding or fabrication of a material fact that induces a party to enter a contract. How I explain it to my clients so it’s easy to understand is; for the insurance company to deny a claim against the person who made the misrepresentation, the insurance company must show that if they had known about the hidden or fabricated statement of fact when deciding to enter the contract they would not have issued the contract or would have charged a higher premium.

Five important things to remember:

  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.
  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 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.
  4. Your family might wait longer for the money if you die during the contestability period. An insurer probably won’t look into a claim when the insured dies in a car accident, for instance. But a 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.
  5. 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.

Why does a contestability period exist?

The two-year contestability period begins on the issue date of your coverage, and it protects insurance companies from financial losses due to fraudulent claims. Because the cost of premiums for life insurance is typically based on a buyer’s age and medical history, some people may try to minimize their monthly premiums by intentionally misrepresenting certain aspects of their health and lifestyle.

So unless you lie on your life insurance application, the contestability period is nothing to worry about.

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