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BLOG 04/11/2022

Life insurance contestability period

In many cases, your life insurance company will provide your beneficiaries with a death benefit if they file a claim following your death. However, suppose you pass away within the first two years after your policy was issued. In that case, the insurance company will review your application and investigate whether any fraud or misrepresentation may have occurred. If the insurer finds anything out of place during this life insurance contestability period, like a medical condition or a lifestyle habit you didn’t mention on your application, they may have grounds to deny the claim or pay a reduced death benefit.

As an applicant or policyholder, it’s important to understand what the contestability period is, what happens if your insurer finds a misrepresentation during this time, and how you can protect loved ones from a denied claim or reduced death benefit.

What is the life insurance contestability period?

The life insurance contestability period typically lasts one to two years from the date you purchased your life insurance policy. During the contestability period, your insurer can question or contest a claim filed by your beneficiaries, which protects the company from enduring financial loss from any fraudulent claims. It’s important to note that the contestability period will often restart if your life insurance policy lapses or you obtain a new policy.

If a claim is filed during this time, your insurance company may review your medical records, criminal records, and employment to confirm that everything you listed on your application was truthful and accurate.

The entire contract clause allows your life insurance company to terminate your contract and deny coverage if you have any misleading statements or omit information from your application. Yet, the misrepresentation doesn’t need to be directly related to your cause of death. For example, if you died in an accident operating machinery at work and failed to mention that you smoke cigarettes, the insurer could uncover your tobacco use during the contestability period.

Other examples of misrepresentation may include:

  • Drug/alcohol abuse
  • Tobacco use
  • Dangerous hobbies
  • Lying about income
  • Not mentioning treatment of minor ailments
  • Not disclosing doctor visits or hospital stays
  • Having other life insurance policies
  • Not disclosing a criminal record
  • Not disclosing a chronic illness
  • Test results revealing a severe illness

Some misrepresentations could be minor, like if you write the wrong address or forget to disclose an insignificant outpatient procedure you had years ago. However, if you intentionally used false or misleading statements, your insurer has the ability to contest the claim, which potentially voids your life insurance contract. Unfortunately, that could mean your beneficiaries may not receive the policy’s death benefit, or they’d receive a reduced payout instead.

What happens if an insurer finds a misrepresentation?

If your insurer finds a discrepancy during the contestability period, there can be different outcomes depending on the severity of the misrepresentation.

For example, falsifying information about your health history, gender, age, or family history could mean you incorrectly qualified for a lower premium. In that case, your insurer will typically pay the death benefit to your beneficiaries but subtract the amount they would have charged you if the initial information provided was correct.

On the other hand, if you intentionally exclude serious information, your insurer may not pay out the death benefit to your beneficiaries. Instead, they may provide your beneficiaries with however much you paid in premiums for your insurance policy before your death.

The contestability period also allows your life insurance company to deny the claim altogether, depending on the severity of the misrepresentation. For example, if you didn’t mention a previous DUI and died in a car accident while drinking and driving, your beneficiaries may not receive any benefit from your life insurance policy.

What happens if you lie on a life insurance application?

Some incorrect statements on a life insurance application might be minor, but others could severely impact your death benefit if discovered. For example, a typo on your driver’s license number may be accidental and wouldn’t necessarily be grounds for denying a claim. Yet, if you’ve been diagnosed with a heart condition and try to cover it up by lying to your insurer, there could be implications for your policy’s death benefit.

By leaving out important information or providing misleading data on your life insurance application, you may be leaving your loved ones to deal with the consequences of your actions when they need the most financial protection.

If your insurance company discovers that you misrepresented on your application, they have the right to cancel your coverage which could leave your beneficiaries without financial security to cover any end-of-life expenses like funeral costs, medical bills, and any debt you may owe.

How to avoid an issue with the life insurance contestability period

Sometimes, people are not truthful on an insurance application about their age, health, medical history, or lifestyle choices. And while choosing the non-smoker box when you only smoke one cigarette a day might seem like a minor detail, it can have far-reaching impacts for your beneficiaries.

Insurers have ways to fact-check your life insurance application during the life insurance contestability period. So, it’s vital to be honest from the beginning to avoid any potential issues that may arise during the life insurance contestability period. A truthful application can also help prevent your beneficiaries from experiencing the negative outcome of a denied claim or a reduced benefit.

If you have questions about the life insurance contestability period or would like assistance with the application process, eFinancial is here to help. Talk to an agent today to explore your options.