The Life Insurance ‘Contestability Period’ Explained

If someone dies within the first two years of having a policy, the insurer can potentially dispute the claim.
Barbara Marquand
By Barbara Marquand 
Edited by Amy Danise

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The word “contestability” might sound a little frightening when it's associated with your life insurance policy. “Contest” implies that there's a winner and a loser, and nobody wants to be on the wrong end when it comes to financial security.

Normally when someone dies who has life insurance, the insurer pays the policy's beneficiaries soon after a claim is filed. But if a person dies within the first two years of having the policy — what's typically known as the contestability period — the company has the right to delay payment while it investigates the beneficiaries' claim, and it can dispute the claim if it finds evidence of misrepresentation.

But unless you lie on your life insurance application, the contestability period is nothing to worry about.

Why the contestability period exists

People occasionally lie on life insurance applications to get better prices or policies they wouldn’t otherwise qualify for. Others make honest mistakes their provider doesn’t catch. The contestability period exists to protect companies in those instances.

“The decision of whether or not to investigate a claim is determined by a claim examiner on a case-by-case basis,” says Whit Cornman, a spokesperson for the American Council of Life Insurers. “An examiner may consider investigating a claim if there’s evidence to suggest an insured’s application for coverage may have included a material misrepresentation.”

The manner of death could trigger an investigation. Say, for example, an insured person dies of heart disease shortly after buying a policy.

“A claims examiner may review the application to see if the insured disclosed they were being treated for the disease,” he says. “Omitting this fact could be considered a material misrepresentation.”

What happens if an insurer disputes a claim

If, after reviewing medical and other information submitted with the life insurance applications, the insurer discovers the insured person misrepresented something, it generally will do one of two things:

  • Pay the death benefit, minus the additional premiums it would have charged had it known the details. (For example, deducting the additional amount a smoker would have paid, if he was charged a nonsmoking rate.)

  • Deny the claim and return the premiums to the beneficiary. That’s likely to happen only if the new information would have resulted in a denial of coverage.

What happens if an insurer approves a claim

If there is an investigation that vindicates the beneficiaries, the payment will include interest to cover any delay it caused.

The length of an investigation varies depending on the circumstances, Cornman says. “The interest rate and the timing for when interest begins to accrue after the death of the insured vary from state to state."

Keep in mind that delayed and denied life insurance claims are fairly rare. In 2014, $394 million in new claims were in dispute, according to the latest data from the American Council of Life Insurers. That’s less than 1% of the almost $68 billion that insurers paid to beneficiaries that same year, according to the council’s analysis of data from the National Association of Insurance Commissioners.

Note: The contestability period is different from the “suicide clause,” although they’re often confused. Life insurance policies generally include a clause saying they won’t pay out if the insured person dies from suicide within the first one or two years of the policy. The time period varies by state law.

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Being honest pays

Remember, as long as you’re honest with the insurance company when you apply for coverage, you can trust your beneficiaries will get the life insurance payout, even if you die the day after the policy goes into effect.

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