Insurance Policies: Understanding the Contestability Period

Insurance Policies: Understanding the Contestability Period

The contestability period is a significant aspect of life insurance policies, and it's crucial for policyholders to understand what it entails. This period is typically two years long and is designed to protect insurance companies from potential financial losses due to fraudulent claims.

What Is the Contestability Period?

The contestability period begins once a policy is signed and becomes active. During this period, the insurer has the right to investigate the application for fraud and misrepresentation. If the insurer discovers that the applicant hid or misrepresented facts, they may deny a claim for death benefits. This period also applies to cases where the insured commits suicide within the first two years of coverage.

Reasons for the Contestability Period

The contestability period exists to protect insurance companies from financial losses due to misrepresentations in applications. Some people may intentionally provide inaccurate information to secure better rates or coverage they wouldn't otherwise qualify for. The contestability period allows the insurer to verify the applicant's information and ensure that the premiums are based on accurate data.

What Happens If an Insurer Disputes a Claim?

If an insurer discovers misrepresentation during the contestability period, they may deny the claim and return the premiums to the beneficiary. In some cases, the insurer may pay the death benefit minus the additional premiums they would have charged if they had known the details. This is often the case when the new information would have resulted in a denial of coverage.

What Happens If an Insurer Approves a Claim?

If the investigation vindicates the beneficiaries, the payment will include interest to cover any delay it caused. The length of an investigation varies depending on the circumstances, and the interest rate and the timing for when interest begins to accrue after the death of the insured vary from state to state.

Being Honest Pays

As long as you're honest with the insurance company when you apply for coverage, you can trust your beneficiaries will get the life insurance payout, even if you die the day after the policy goes into effect.

Contestability Period vs. Incontestability Laws

Incontestability laws are different from the contestability period. In many states, life insurance policies cannot be cancelled after they have been in effect for two years, except in the case of non-payment of premiums. Incontestability laws were enacted to prevent stale claims and to protect beneficiaries from claims that might be difficult to defend due to the passage of time.

After the Contestability Period

After the contestability period ends, life insurance coverage is usually considered incontestable. This means your beneficiary will usually receive the coverage amount as long as the coverage was in force. However, if your coverage lapses, a new contestability period will go into effect when you reinstate or purchase a new life insurance policy.

Important Considerations

It's essential to understand the terms of your coverage before you purchase a life insurance policy. Be sure to provide accurate information during the application process, and consult with a professional if you have any questions or concerns about the contestability period or your policy.