Contestability Period in Life Insurance Meaning
Buying life insurance means financial protection for your beneficiary upon your passing. When you die, a payout known as a death benefit will go to them from your insurer. Your policy should have a high enough coverage amount to handle the expenses you left behind, as well as for your chosen beneficiary.
While this seems fairly cut and dry, if your loved one died shortly after getting one of these policies, things may not go as you plan. Though, as the chosen benefit recipient, you should meet the eligibility requirements set out in your life insurance policy, there is still a chance for a claim denial or reduction in the payout. This is typically a result of the insurer reviewing your coverage and finding information that can affect compensation owed and could go on for two years, starting from the effective day of your insurance.
The one or two years after a policy becomes effective, which allows the insurer to review your coverage for any misrepresentations or mistakes on your application after your passing, is the contestability period. This process ensures that all of your original facts and statements made when you first applied are accurate.
When a policyholder passes during this time frame, and a review uncovers misrepresented information about anything, the company could cancel the policy altogether and deny the death benefits due to your beneficiary. They could also opt to deduct the adjusted difference from the final payout, but it is crucial to understand that the contestability period is to life insurance fraud.
Keep in mind that most carriers are less likely to review insurance policies once the two-year contestability period has passed.
Many contestability reviews result from suspicious circumstances surrounding your death, and an investigation is necessary before issuing payment of benefits. It is also possible that simply not being accurate about health conditions on your original policy application can lead to a denial, as well.
Even if you technically died in a car accident, not sharing you had an underlying health issue can lead to a cancellation of your coverage. Lying about your age, where you live, or any other inaccuracy on your paperwork can give the life insurance company in charge of your benefits a reason not to pay out.
You can also undergo a review while still alive and perfectly healthy, and possibly lose your coverage. Life insurance companies create policies on the information we share with them. However, if you misrepresent your health, line of work, or other relevant details, you can still face losing your life insurance or, at a minimum, have a large amount of money due to adjusting your premiums to the correct amount.
Do not risk leaving your loved ones without the means necessary to continue comfortably in life after you die. You should be honest and clear about your entire medical history when applying for a policy because once you pass, you cannot clear up inconsistencies that will ultimately cancel your policy. Also, do not fall to the temptation of omitting important context to your work or activities. If you claim to like hiking but actually free climb on the face of mountains, this could lead to your policy benefits getting contested or canceled. Protect your beneficiaries by being truthful and keeping your carrier abreast of any changes that would affect your coverage.
The reality is that many insurance companies only focus on protecting their bottom line and look for any excuse, including purposely misconstruing application mistakes, to deny what is rightfully due to your loved ones.
While your life insurance company's investigation into your death does not mean your beneficiary will receive a claim denial, it is critical to have an experienced attorney on hand to make sure this does not happen. The contestability period can significantly impact not just claim approval, but how much death benefit your loved one will actually receive. This period is not only about making sure you were honest, but it is about the carrier saving money any way they can justify it.
Your insurer may still honor your life insurance policy even if some information was not entirely accurate, but this is highly subjective. Some companies will manipulate the smallest of errors to avoid a payout and have little remorse about leaving your chosen recipient without recourse because of it. When you are completing the information to buy a new policy, be meticulous and accurate to avoid this from happening to your loved ones.
A valid question many life insurance policyholders wonder about is why insurers do not conduct thorough applicant investigations before issuing a new policy. And this is a valid point to be made. With the ease of access to information, why is it enough to simply answer a few online questions and purchase a policy without any physical exam or records request?
This is a reasonable argument, especially in today's online environment, where anyone can buy no-exam life insurance online by answering a few health questions. The insurance underwriters have no way of truly knowing the state of even your most basic of health issues when approving your policy request.
Another interesting fact is that requesting medical history from your physicians and other healthcare providers is not customary when issuing coverage either. Approving or denying life insurance policy applications is one of the most uninformed decisions policy underwriters make every day. Imagine all of the costly investigations that would not be necessary if more in-depth scrutiny of applicants took place at the start.
The reason, according to the life insurance companies, is saving on time on processing. Carriers want us to believe that they trust us to be truthful and honest and that fraud is not the norm, plus who wants to wait months for a policy to get approved? The amount of resources spent on an investigation is indeed significant when factoring in the cost of requesting records or sending customers to get a physical exam first. There is another aspect of how the contestability period and insufficient verification procedures for buying a policy can affect death benefits later.
When a person buys an online policy without an exam or in-depth review of their information, it also encourages the insured to not worry about the finer details. How much does this agency care about accuracy if they do not examine submitted details carefully from the beginning? These companies rely on simple mistakes in the application to cancel policies, deny claims, and return all the money spent on premiums before the policyholder has died.
By not ensuring you submitted accurate information about your life circumstances and health, the company is taking out an insurance policy against you. They can hedge their bets against your own by using the contestability period to find misrepresentations and mistakes that will result in denying the beneficiary’s claim.
The first two years after a life insurance policy goes into effect usually satisfies the time requirements that an insurer believes fraudulent information about the insured would come to light. If a claim for death benefits happened in that first few years, they are sure the cause of death will connect with certain statements and information on the original application or through other documented sources, like medical records.
This after-death process is also known as post-claim underwriting. This action aims to find a way to legitimately rescind a policy and avoid the payout owed to the beneficiary.
If you have read about celebrity deaths in the news and how their life insurance company is contesting the policy, it probably has to do with the contestability period and millions of dollars being on the line. These two years give insurers plenty of time to review every minute detail on the application for any inconsistencies that can void the policy or at least reduce the benefit.
Several inconsistencies would trigger one of these post-claim underwriting events, such as:
- Mentioning one likes swimming, but leave out this activity is with sharks
- Not disclosing a smoking habit and died of related cancer
- Claiming to be in good cardiovascular health, but actually suffering from advanced heart disease
Any purposeful misconstruing or omission about health or activities that could affect well-being
The cause of death is of high importance if your family member passed away within the contestability of their life insurance policy. This reality makes it vital to plan for potential benefit claim denials and warrants speaking with an experienced life insurance claims attorney to understand your next steps.
During a policy review following your loved one’s death, if a found misrepresentation affected the previously paid premium costs, it is possible to ask for an adjustment to the final death benefit amount. This solution may be an option for situations where a policyholder writes down an incorrect age on their application to get a cheaper monthly policy rate. In this case, if they were actually older, the insurer could charge for the difference in policy costs for the two differing ages and then collect the difference.
Under circumstances that generally would have denied initial approval of coverage from the beginning, the carrier company could often return the monies paid for coverage and deny the claim.
For many policyholders, getting past that initial two-year window of coverage eliminates worries concerning contestability issues. This reasoning is mostly true, so long as one stays current on their premiums.
What comes as a shocking surprise to some surviving recipients is that this time period can, in a sense, start anew if there were a lapse in premium payments. For those whose deceased loved one had an insurance policy that got behind on monthly payments, you may discover that they not only had to reapply for their life insurance, but the contestability period began all over again from the new effective date. This means that despite their having insurance for decades, if they died within two years of fixing that lapse, their policy is once again subject to review before payout.
It is a well-known fact that life insurance providers do not pay death benefits when the cause of death is suicide during the contestability period. Known as the "suicide clause," it is a separate rule related to the review process when a covered individual dies in the first two years of coverage.
In short, contestability gives the insurer rights to scrutinize details surrounding a policyholder's death. If the cause of death is suicide, the company will outright deny the benefit owed to the designated beneficiary.
The actual suicide clause sets the guidelines for payout when the covered party dies this way in the first two years of coverage. If this tragic event happened after the contestability period, the life insurance company will pay the benefits due, so long as a lapse hadn’t occurred that would have reset this two-year time frame.
This situation makes for a sensitive and challenging interaction for surviving beneficiaries dealing with insurance companies to get the compensation they need to take care of funeral expenses. It's essential to work with a compassionate insurance claims attorney who can handle these communications and allow you to focus on healing after your loss.
During this difficult time of grief and loss, you may not have the wherewithal to navigate and negotiate with your lost loved one’s life insurance carrier for the payout you are due. Consult with us to learn more about how we can help represent you during the contestability period and protect the legacy intended to benefit your family.