When you purchase a life insurance policy, your insurer guarantees to pay a death benefit to your beneficiaries when you die. But if you die within the first two years of taking out a policy, the company can delay or deny payment while they confirm if you were truthful in your application.
What is the contestability period?
The life insurance contestability period is the time frame in which insurers can review your application and adjust or deny the death benefit. It starts the day your policy goes into effect, and usually lasts two years.
How does the contestability period work?
The contestability period typically becomes a factor when you die. If you die within the first one to two years of purchasing your policy, your insurer might hold off on paying out your death benefit while they investigate fraud. If they discover you lied on your application, they can deny the death benefit or reduce the amount — even if the cause of death had nothing to do with the details you withheld.Let’s say you died in a car accident, and the insurer finds out you failed to disclose that you had a drug addiction or major surgery on your application. Since you lied, they can cancel your policy and refuse to pay your beneficiaries.
Here’s another example. One insurer might consider you a nonsmoker if you haven’t touched tobacco for a year, while others will allow a celebratory cigar once a month. If you say you don’t smoke, yet you die from a respiratory disease, your insurer might investigate the claim. The same goes if you lied about details like your age, occupation, hobbies and family medical history.
What happens if your policy lapses?
If you fall behind on your premiums and your policy lapses, your insurer might give you the option to reinstate your coverage. In this case, the contestability period will reset — meaning your insurer has the right to investigate the cause of your death for two more years.
What is the incontestability period?
When the contestability period is up, most policies enter the incontestability period — which means the insurance company can no longer review claims. Also known as the “incontestability clause,” this prevents insurers from withholding payment to your beneficiaries.
To learn the limits of your contestability and incontestability periods, read the fine print of your policy.
The purpose of the contestability period
The contestability period is in place to protect insurance companies from fraud.
Sometimes, people lie on applications to get a cheaper premium, or to qualify for a policy they wouldn’t otherwise be eligible for. And in some cases, people make honest mistakes. Either way, this period of time allows the company to investigate if unnecessary and unaccounted for risks were insured.
What happens when an insurer disputes a claim?
If your insurer confirms that you lied or withheld information from your application, they’ll take one of two actions:
- Pay the death benefit — and deduct the premiums they would have charged the policyholder if they’d known the missing piece of information. So, if you’re a smoker but got a nonsmoking rate, the insurer might subtract the extra money you would have paid as a smoker. Similarly, if you said you occasionally hit the slopes but were actually an extreme snowboarder, they might adjust the death benefit to reflect that.
- Deny the death benefit. This means your beneficiary won’t receive a payout.
Guide to the claims process
Five things to know about the contestability period
The contestability period can be confusing — here are the main things to know:
1. Lying on your application has consequences
When you apply for life insurance, be upfront about everything from your health and medical history to your hobbies and lifestyle. If you lie, you’re putting your beneficiaries’ payout at risk.
Remember, the contestability period is there to make sure your application is accurate — and to give insurers recourse if it isn’t. If you’re honest, you have nothing to worry about.
2. The insurer has to pay the death benefit if everything checks out
Life insurance companies are entitled to investigate the claim if you die during the contestability period. But if they come up with nothing, they have to pay your beneficiaries the death benefit. This applies even if you die on the same day — or hour— you took out the policy.
3. Your insurer can pursue legal action while you’re alive, too
If you lie on your application and live past the contestability period, you’re not off the hook. Your insurance company can pursue legal action while you’re alive and charge you for insurance fraud at a later date. And if you’re alive and the company discovers you lied on your application during the contestability period, they can cancel your policy.
4. A lapsed policy could restart the contestability period
If you don’t pay your premiums and your policy lapses, your insurer might allow you to reinstate your policy. But the clock will reset on your contestability period — meaning your insurer will have a two-year window to review your application and change the death benefit. And if you die within those two years, they can delay paying your beneficiaries while they investigate.
5. The contestability period is different from the suicide clause
Most life insurance policies have a suicide clause — and while it has a similar time frame to the contestability period, it’s treated separately. Under the clause, insurers won’t pay the death benefit and will return any premiums paid to the beneficiaries if the policyholder commits suicide within the first two years of buying a policy.
If the policyholder commits suicide after the two years have passed, the insurer will pay the death benefit.
Compare life insurance companies
The contestability period is designed to protect insurers’ bottom line. While it sounds intimidating, it only affects you — and your beneficiaries if you misrepresent something on your application. As long as you’re transparent with your insurance company when you apply for coverage, your loved ones will receive the full payout.
Policy details can vary, so be sure to compare life insurance companiess.