Understanding Life Insurance's Two-Year Contestability Clause

The life insurance contestability period is a two-year window that begins when a policy goes into effect, during which insurance companies can investigate and deny claims if they find that the policyholder misrepresented or omitted important information on their application. This period is designed to protect insurance companies from fraud and typically applies to policyholders who intentionally lied on their life insurance application. While honesty is crucial when applying for life insurance, it's important to note that insurance companies can still investigate and deny claims beyond this period if fraud is discovered.

The two-year contestability period

The life insurance contestability period is a short timeframe, typically lasting two years from the policy's start date, during which the insurance company can review and potentially deny a claim if they find that the policyholder misrepresented or omitted important information on their application. This period is designed to protect insurance companies from fraud and ensure customers are getting the best plan for their health and lifestyle.

If the insured person passes away within this period and the insurer discovers discrepancies, they may investigate the claim and, in some cases, refuse to pay the death benefit. This investigation process may include viewing medical records, lab results, an autopsy report, and statements from the deceased's friends and family members.

During the contestability period, insurance companies can deny a claim if they find that the policyholder intentionally lied or withheld information on their application. For example, if someone claimed to be a non-smoker during the application process but passed away from smoking-related causes within the first two years of their policy, an investigation would likely be triggered.

It's important to note that not all claims filed within the contestability period are investigated. The insurance company has the legal right to investigate during this period, but they usually only do so when there is a reason to suspect misrepresentation.

If a claim is investigated and fraud is discovered, the insurance company has a couple of options:

• If the missing information would have caused the application to be denied originally, the death benefit will not be paid to the family.
• If the missing information would have resulted in higher premiums, the difference in premium costs will be deducted from the death benefit amount, and the family will receive the remaining balance.

While most states in the US have a two-year contestability period, Missouri has a one-year contestability period, and some companies may have shorter contestability periods. Additionally, the contestability period renews if the policy lapses due to non-payment of premiums.

What happens if an insurer disputes a claim

If an insurer disputes a claim, it's usually because they believe the policyholder misrepresented themselves in some way. This could be because they lied about their medical history, occupation or hobbies, or because they failed to disclose another life insurance policy. In some cases, the insurer may dispute the claim if the policyholder died while performing an illegal act or due to a pre-existing medical condition.

If your life insurance claim has been denied, you can take steps to contest the rejection. Here are some options:

• Provide additional supporting documentation: This could include medical records, autopsy reports, or insurance payment receipts. For example, if you can produce receipts showing that the policyholder was paying their premiums on time, you may be able to disprove policy delinquency as a reason for denial. Similarly, autopsy results may help prove that the policyholder did not die by suicide during the contestability period.
• Contest the rejection: Denied beneficiaries may be able to appeal the claim by presenting evidence according to the process established by the insurer. This process will vary depending on the insurer, but it's important to act quickly, as there is often a time limit for appeals.
• Seek external help: If you are unsure of your next steps, you can seek guidance from your state's department of insurance or attorney general, or from independent organisations such as the Australian Financial Complaints Authority (AFCA) or the Financial Industry Disputes Resolution Centre (FIDReC) in Singapore. These organisations can help resolve complaints and disputes between consumers and financial firms, including life insurance providers.
• Take legal action: Resolving life insurance disputes through legal action is usually a last resort, as it can be time-consuming and expensive. However, if you feel that you have been treated unfairly and have been unable to resolve the dispute through other means, seeking legal advice and taking your complaint to court may be an option.

It's important to note that life insurance claim denials are fairly uncommon, and insurers should pay on the policy as long as investigations find no conclusion of wrongdoing. Being honest on your life insurance application and understanding the policy terms and conditions can help avoid potential claim denials for your beneficiaries.

What happens if an insurer approves a claim

If an insurer approves a claim, the beneficiary will receive the death benefit. The time taken to process a claim varies, but it usually takes around 30 to 60 days. The length of an investigation depends on the circumstances, and the interest rate and timing for interest accrual differ from state to state.

The beneficiary can choose how they would like to receive the payout, with the most common options being:

• Lump-sum payment
• Specific income payout
• Lifetime annuity
• Fixed-period annuity
• Retained asset account

The payout option is usually chosen when the claim is filed and approved, but some insurance companies allow the insured to indicate their preference when setting up the policy.

It is important to note that there is no deadline for filing a life insurance claim, but it is recommended to do so as soon as possible to avoid delays.

The suicide clause

If the policyholder dies by suicide within the exclusion period, the insurance company will not pay the death benefit, and their liability is usually limited to a refund of the premiums paid. However, after the exclusion period ends, the policy's beneficiaries can receive a death benefit if the covered person dies by suicide.

It is worth noting that the contestability period and the suicide clause are two different things, although they are often confused. The contestability period refers to the insurer's right to investigate and potentially deny a claim if they find that the policyholder misrepresented or omitted important information on their application. This period also typically lasts two years from the policy's start date.

A new contestability period

The contestability period is a two-year window (one year in Missouri and some companies/states) that begins when a life insurance policy goes into effect. During this time, insurance companies can investigate and deny claims if they find that the policyholder lied or omitted important information on their application. This period exists to protect insurance companies from fraud and ensure customers get the best plan for their health and lifestyle.

In some cases, a new two-year contestability period can start. This happens if your policy lapses due to non-payment of premiums and is then reinstated, or if you transfer the cash value of a permanent life insurance policy into a new policy. A new contestability period will also begin if you make a policy amendment, such as when replacing an old policy for a new one.

If you are honest and accurate when filling out your life insurance application, you can avoid issues with the contestability period. It is important to disclose all facts about your medical health profile and be as precise as possible. Any inaccuracies, even if unintentional, can lead to issues with your claim.

While the contestability period is when insurers are most likely to investigate a death claim, they can still investigate any claim at any time if there are signs of fraud. Therefore, it is crucial to be transparent and accurate throughout the application process to avoid potential issues down the line.

Frequently asked questions