Life Insurance: Contesting Concealment And Its Limits

Life insurance policies typically include a contestability period, usually lasting two years, during which the insurance company can investigate and deny claims due to misrepresentation or fraud. This period allows the insurer to review the policyholder's application for intentional errors, such as the omission of information that would have affected the issuance or rate of the policy. If the insurer discovers withheld information after the policyholder files a claim, they may refuse to pay out on claims related to the concealed information. This is known as concealment and is considered a form of misrepresentation. To avoid complications, policyholders must understand the contestability period and be honest in their applications.

Contestability period

The contestability period in life insurance, typically lasting two years, allows the insurer to investigate and deny claims due to misrepresentation or fraud. During this period, the insurance company can be exempt from paying out the death benefit if it finds intentional misrepresentations or omissions in your application. For example, if you purposefully concealed a diagnosis of depression, the company could deny or reduce the amount your beneficiary receives.

The contestability period exists primarily to protect insurers from fraud and to ensure fair premiums. Life insurance involves a significant financial risk for the insurer, and the contestability period allows them to investigate potential fraud or intentional misrepresentation on the application. This helps to prevent financial losses and ensure that policyholders pay the correct premium based on their risk profile.

It is crucial to be honest on the application to avoid complications. After the contestability period ends, the life insurance policy becomes incontestable, providing added security. The insurer can no longer deny or contest a claim based on information provided in the original application, unless there was fraud or non-payment of premiums.

In some cases, an incontestability clause may be included in the life insurance policy. This clause makes it impossible for the company to contest any statements made in the application or any concealment of material facts after a specified period, usually two years. The clause is designed to protect the policy owner and beneficiary and is required by many states.

To avoid life insurance disputes, it is important to update beneficiaries as needed, follow insurance company procedures when making beneficiary changes, and discuss any changes with your loved ones.

Incontestability clause

An incontestability clause is a provision in a life insurance policy that prevents the insurance company from voiding coverage or denying a claim due to a misstatement by the insured after a specific amount of time has passed—usually two years. This clause is designed to protect the policy owner and beneficiary against any attempt to set the policy aside.

The incontestability clause is one of the strongest protections for a policyholder or beneficiary. While many other legal rules for insurance favour the insurance companies, this rule is notably and strongly on the side of the consumer.

How an Incontestability Clause Works

Conventional rules for contracts stipulate that if false or incomplete information was provided by one party when making the contract, then the second party has the right to void or cancel the agreement. The incontestability clause forbids insurance companies from doing this.

Common Exceptions to the Incontestability Clause

• In most states, if the insured person misstates age or gender when applying for life insurance, the insurance company may not void the policy, but it can adjust death benefits to reflect the policyholder's true age.
• Some states allow insurance companies to include a provision stating that a one- or two-year contestability period must be completed within the lifetime of the insured. In this scenario, a life insurance company can refuse to pay benefits if a policyholder was so unwell when they applied for coverage that they died before the contestability period was over.
• Some states also allow the insurance company to void a policy if deliberate fraud is proven.

Misrepresentation

Life insurance fraud can take many forms, including misrepresentation. This is considered a serious offence as it undermines the integrity of the insurance contract. When applying for a life insurance policy, applicants are required to provide accurate and truthful information about their health, lifestyle, and other relevant details.

• Concealing pre-existing medical conditions
• Failing to disclose risky hobbies or occupations
• Providing inaccurate information about personal habits like smoking or alcohol consumption
• Lying about income or net worth to qualify for a larger policy
• Identity theft

The consequences of misrepresentation can be severe and include policy rescission, premium adjustment, and claim denial. If a misrepresentation is discovered, the insurance company may have grounds to rescind the policy entirely, leaving beneficiaries without financial protection. In some cases, the insurance company may adjust the premium rates or deny a claim.

The contestability period, usually the first two years of the policy, allows the insurer to investigate your application and deny a death claim if they find evidence of fraud or misrepresentation. After this period, most policies become incontestable, providing added security.

Fraud

The contestability period exists primarily to protect insurers from financial losses resulting from fraud and to ensure fair premiums for all policyholders. During underwriting, the insurer reviews the information provided by the applicant and may conduct a medical exam to verify its accuracy. If inconsistencies or fraud are discovered, the insurer can deny coverage or adjust benefits accordingly.

The burden of proof lies with the insurer to demonstrate that fraud or material misrepresentation occurred. They must provide evidence to support their decision to deny a claim. Beneficiaries have the right to challenge the insurer's decision by appealing, seeking mediation, or taking legal action.

After the contestability period ends, the life insurance policy becomes incontestable, providing added security for policyholders and their beneficiaries. However, even after this period, insurers can still deny a claim if they discover fraud on the application, such as intentionally lying about a severe medical condition.

To avoid complications, it is crucial for applicants to be honest and forthcoming when providing information on their life insurance applications.

Concealment during warranty

The contestability period in life insurance, which is typically two years, allows the insurer to investigate and deny claims due to misrepresentation or fraud. During this period, the insurance company can be exempt from paying out the death benefit if it finds intentional misrepresentations or concealment of material facts in the application.

Concealment refers to the omission of important information related to an insurance contract. It occurs when an insured party fails to provide information that could affect the terms of the policy, even if the insurance company does not ask a direct question. Many insurance policies include warranty statements that avoid possible concealment, and these warranties can be either affirmative or promissory.

Affirmative warrants apply to the time of making the statement, coinciding with the creation of the contract. For example, an insurer may ask an applicant if they have any traffic violations, and the insurance provider may void the auto insurance policy if the applicant's answer is later found to be false. In this case, the entire contract is void because the untrue statement was given at the contract's inception.

Promissory warrants apply to events that will remain true in the future. For instance, an applicant may sign a promissory warrant stating that they will not begin to use tobacco products. If they are later found to have started using these products, the insurer may cancel coverage or deny claims.

It is important to note that the contestability period helps protect the life insurance company from fraud. Statistically, it is very unlikely for an individual to die during the first two years of a life insurance policy. This period allows the insurer to confirm that the policyholder did not withhold or lie about any health or lifestyle-related information during the application process.

To avoid complications and ensure that your claims are honoured, it is crucial to be honest and forthcoming on your life insurance application.

Frequently asked questions