Life Insurance Contestability

By Diana Palmieri

State laws regarding life insurance contestability were put in place sometime in the mid-19th century as insurers were not paying out claims because of mistakes on applications. Insurers then had clauses in policies saying they could not contest claims except within the contestability period.

There are a lot of misconceptions about contestability. The basic definition of life insurance contestability is the short span of time that an insurance company can investigate and potentially deny a claim. This means they will look back at the original underwriting decision and review medical information and other statements provided on your application. They can even interview family members or friends. This is done simply to verify if fraud has been committed. It is different from the suicide clause, which I will discuss a bit later. Two years is the limit in most states, others are one year, and all begin as soon as the policy goes into effect. Check with your agent or insurer to find out the period of time that applies in your state.

You should not fear contestability if you have done what you were supposed to do on your insurance application, which was to be honest and provide accurate information. Trying to get lower rates by lying or omitting information only hurts your beneficiaries.  If you are a smoker and you are approved as such, accept the smoker’s rating and reapply a few years later after you quit; hopefully you will obtain a better nonsmoker rating provided your health status has remained basically the same. Just because you are rated once by the insurer, it does not mean you have to carry that rating for the rest of your life, especially if you decide to change for the better. Most people don’t realize they can reapply. Yes, you will be older; however, the difference in premiums for a smoker vs. a nonsmoker varies greatly. Check with the individual carrier to see how long you have to quit before there’s a change in rating, and compare premiums. Also be aware that if you decide to take on and accept a new policy, a new contestability period will begin.

Now, let’s talk about the suicide clause. An insurance company will not pay out a death benefit but return the premiums paid if the insured commits suicide within the first two years of the policy. After two years, if the insured commits suicide, the policy will pay out.
You also have to be careful if your policy lapses from nonpayment of premium. You then arrange to pay up your premium and your policy is then reinstated. Some insurers will require a new contestability period that will begin from the date your policy was reinstated. Verify with your insurer.

Do not take insurance fraud lightly. If you did fib on your application, omit medical or financial information, and think you’re in the clear, think again. An insurer can do what’s called a rescission. A rescission allows the company to cancel the contract if they suspect fraud. This can be done even after the contestability period expires.

Bottom line: Don’t lie or omit information on an insurance application. Pay your premiums on time. Do not put your beloved beneficiaries in jeopardy.


Diana Palmieri is dually registered with Vanderbilt Securities LLC and H Beck Inc., which are unaffiliated. Securities offered through Vanderbilt Securities LLC, member SIPC/FINRA/MSRB. 




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