Life Insurance: Reinstated, But Still Contested?

Life insurance policies can be reinstated after they lapse, but the process and requirements vary depending on the time elapsed and the insurance company. Typically, a grace period is offered for late payments, during which the insurance company remains responsible for paying death benefits. If the policy lapses after this grace period, it can usually be reinstated within 30 days without additional paperwork. However, the insured must make legally binding statements about their health, and a reinstatement premium is often required. After 30 days, the insured may need to undergo a medical examination, and reinstatement becomes more challenging.

It is important to note that reinstating a life insurance policy may restart the contestability period, during which the insurance company can investigate claims and deny coverage if any information on the application is found to be false or incomplete. This period typically lasts for two years from the date of policy approval or reinstatement. Therefore, if the insured dies within two years of reinstatement, the insurance company can review the application for misstatements and omissions and potentially deny the claim.

Contestability period restarts after reinstatement

The contestability period refers to the time after policy approval when an insurer can still investigate claims. This period typically lasts two years from the date of policy approval. During this time, an insurer can challenge any claims made by the policyholder if they are deemed to be incorrect or invalid.

Reinstating a life insurance policy after it has lapsed can restart the contestability period. This means that if the policyholder dies within two years of reinstatement, the insurer can review their application for misstatements and omissions. If the insurer finds any material misstatements or omissions on the reinstatement application, they can deny the claim and rescind the policy.

For example, if a reinstated policyholder states on their application that they are a non-smoker, but then dies of lung cancer within two years of reinstatement, the insurance company may contest the policy for misstatements. This could result in a reduction or denial of the death benefit paid out to beneficiaries.

It is important to note that not all life insurance policies have a two-year contestability period, as the duration is controlled at the state level. Additionally, the contestability period is not intended to punish policyholders for minor errors or omissions. Rather, it aims to identify individuals who intentionally provide incorrect information to avoid higher premiums.

Reinstatement within 30 days of lapse

Reinstatement within 30 days of a life insurance policy lapse is possible without additional paperwork, underwriting, or attestations of health. However, insured individuals will likely have to pay a reinstatement premium, which is larger than the original premium. This additional premium is added to the accumulated cash value of the policy, and it is used to cover the administrative expenses incurred from the lapse.

In most cases, a grace period is given for late payments before a life insurance policy terminates. This grace period typically lasts between 30 and 31 days, but some insurers may extend it to 60 or 90 days. During the grace period, the insurance company remains responsible for paying death benefits on valid death claims. If the insured passes away after a missed payment but within the grace period, the insurance company must still pay out the claim, although they will likely deduct any missed premium from the benefits payout.

If you fail to pay your premiums during the grace period, your policy will likely lapse. However, many insurers will allow you to reinstate your policy if you are willing and able to pay your overdue premium shortly after the policy lapse. Often, insurers will give you an additional 15- to 30-day time buffer to reinstate your policy without needing to go through a whole reinstatement process with a new application.

It is important to note that your policy will still have lapsed at the end of the grace period. This means that if you pass away before reinstating your policy, the insurer can deny coverage based on a lapsed policy. Therefore, it is crucial to act quickly if your policy has lapsed to ensure you can reinstate it and maintain coverage.

Reinstatement after 30 days of lapse

Reinstatement after 30 days of a lapse in life insurance policies is possible, but it is a more complex process than reinstating within the grace period. After 30 days, the insured person will likely be required to make legally binding statements about their health and any significant changes to it. This may include a new medical examination or the submission of medical records to verify their statements. If the insured person's health has deteriorated, the insurance company may decline to reinstate the policy.

If the insured person's health is relatively unchanged, they may be able to reinstate their existing policy at the original rate. However, they will likely need to pay all the premiums owed, with interest.

It is important to note that reinstating a life insurance policy after a lapse may restart the "contestability period", during which the insurance company can investigate claims and deny coverage if false or incomplete information is discovered. This period typically lasts for two years from the date of policy reinstatement.

To avoid a lapse in life insurance coverage, it is recommended to set up automatic payments, reduce coverage by removing unnecessary riders, take advantage of flexible premiums, use the cash value or dividends to pay premiums, or consider reducing the death benefit.

Reinstatement with underwriting

As people tend to face more health issues as they age, full underwriting means there is a higher likelihood that the life insurance company will uncover a health issue that may make reinstatement difficult or impossible.

To reinstate a policy with underwriting, you will need to:

• Contact your insurance company to inquire about the amount of payment due for reinstatement, the process for reinstatement, and how much longer reinstatement is an option without underwriting.
• Fill in all the paperwork truthfully and send it, along with the payment, to the correct address at your insurance company.
• Make sure all future premium payments are made in a timely manner to prevent the policy from lapsing again in the future.

Reasons for contesting a life insurance policy

A life insurance policy can be contested for several reasons, and it is not uncommon for an insurance company to look for any legal reason to avoid paying out a benefit. Here are some common reasons for contesting a life insurance policy:

• Non-payment of premiums: The most common reason for an insurance company to refuse to pay out benefits is that the policyholder did not pay their full premiums or missed payments. All life insurance policies require regular premium payments to remain active, so a late payment or missed premium can invalidate the entire claim, even if the policyholder had been paying steadily for years. However, non-payment of premiums does not automatically allow an insurance company to deny benefits, as they may have failed to send the necessary notices of cancellation.
• Policy within the two-year contestable period: Most insurance companies have a two-year contestable period when activating a new policy. If the insured dies within this period, the company may rescind the policy if they find fraud or misstatements in the original application. For example, if an applicant states they are a non-smoker but dies of lung cancer shortly after, the company may contest the policy.
• Unusual circumstances surrounding the insured's death: A life insurance company will typically refuse to pay out benefits if they suspect that a beneficiary was involved in the death of the policyholder or if the insured committed suicide. Almost every insurance policy contains clauses that exempt coverage for suicide, and there are also accidental life insurance policies that do not cover deaths caused by intoxication or other specific circumstances.
• Ambiguity in the policy details: Disputes may arise if the policyholder's children are named as beneficiaries but die before the policyholder, leaving questions about whether the grandchildren receive their parents' share. Unless these situations are addressed in the policy, the insurance company will withhold benefits until they receive an order from a probate court.
• Disputes over beneficiary designation: A life insurance beneficiary designation can be contested if it is believed to be invalid. This often occurs in cases of divorce, where an ex-spouse was not removed as a beneficiary, or in community property states, where an ex-spouse or surviving spouse may challenge a beneficiary designation if they do not receive their legal share of the marital estate.
• Ineffective beneficiary changes: Sometimes, a policyholder attempts to change the beneficiary but fails to follow the insurance company's requirements to do so. For example, a beneficiary change form may need to be witnessed or notarized, and some companies may not accept other written documents such as a will to make a beneficiary change.

Frequently asked questions