The life insurance 'contestability period': 7 things to know
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 die 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 lied -- 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-19th century, says Stephen Rothschild, chair and executive committee member of the LIFE Foundation, an industry group that educates consumers about life, health and disability insurance. 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 have to go after these cases when there's fraud or more people would try [to cheat], and prices would increase for everyone," Rothschild says.
Here are seven things to know about the contestability period.
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, says Keith Friedman, principal of FBO Strategies, an estate and insurance firm in Stamford, Conn.
"My advice is to be honest and don't make it difficult for your family," he says.
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, Friedman says. 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, Rothschild says.
4. You could still get in trouble if you commit fraud and live beyond the contestability period.
Don't think you're free and clear if you live more than two years after the policy goes into effect. Insurance companies can still take action if fraud comes to light.
5. The contestability period is a separate issue from the suicide clause.
Almost all life insurance policies have a suicide clause. It often gets 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 die during the contestability period.
Life insurance companies don't investigate every claim during the contestability period, Rothschild says. An insurer probably won't look into a claim when the insured dies in a car accident, for instance. But an 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.
The payment of the death benefit will be delayed if there's an investigation. But if there was no wrongdoing, Rothschild notes, the insurer will owe the beneficiary interest on the death benefit once payment is made.
7. 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, Rothschild says.
You'll also face a new contestability period if you transfer the cash value of a permanent life insurance policy into a new policy, he says. Policy owners make transfers like this to get a better return on investment.
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