subject: The Incontestability Clause And Life Insurance [print this page] If youve heard this term being thrown around and have always wondered what it meant, heres a quick look at what the incontestability clause on a life insurance policy means, how it works and what benefits it has for both the insured (you) and the insurer (your life insurance company).
According to the Newark Law Review, the incontestability clause allows a policy to be incontestable after one or two years from the date of issue, with the exception of the case in which the premiums were not paid in order to keep the policy in effect1. This clause is also found on health insurance policies.
Meaning of incontestability:
Incontestability essentially means indisputable. After the contestability period has run its course and the policy becomes an indisputable contract, it protects those people who lawfully and truthfully purchasedlife insurance from being sued by their insurer. Almost all states have statutes that require insurance policies to contain this clause. However, any policy issued before this statute was passed in your state is not entitled to the clause retroactively. If you live in a state that doesnt have such a statute but your life insurance policy contract has such a provision, it is applicable and will hold up in a court of law2.
Why it was incorporated into life insurance policies:
It acts as a limiting law which keeps insurers from making money off of honest policy owners who developed or contracted illnesses well after the purchase of life insurance in such a way that could not be helped despite maintaining good health. It creates a specific time frame during which an insurer is expected to discover fraud and/or misrepresentation of information on an application. Make no mistake of how essential this is to life insurance companies; the Coalition Against Insurance Fraud estimates that, in 2006, a total of about $80 billion was lost in the United States due to insurance fraud.
Exceptions to the clause
The biggest exception to the clause is of course, non-payment of premiums. If youre not paying into your life insurance policy, it will lapse and hold no validity in the event of death. This exception prevents over-zealous family members suing the insurer and collecting on a policy despite a lack of responsibility towards timely payments on the insureds part. Other policies are constructed with certain specific exceptions to the clause. An example of this includes double indemnity for accidental death. An insurer may stipulate that the policy is contestable even after the incontestability period has come into effect if the death of the insured by accident needs to be investigated to justify two times the death benefit amount being doled out to the beneficiaries. However, this must be clearly stated in the policy and any ambiguity in the contract language can be used against the insurer2.
A Rather Strange Clause
The Newark Law Review calls this clause an anomaly in contract law, and goes on to say this "To a great extent it nullifies the well-established legal principle that fraud in the procurement of the contract vitiates that contract. It introduces a novel idea into the law, as it recognizes that one party may have secured the contract by defrauding the other, but the parties agree that nevertheless the contract shall be valid." What this means is that if a policy owner has fraudulently bought a policy, it is the onus of the insurance provider to find this fraud and terminate the policy before the contestability period runs out. While some insurers do go after fraudulent claims even after the two year period, it actually makes it easier for policy owners to make fraudulent claims while applying for life insurance and collecting on benefits despite lying.
Summing up
If youre ready to buy a life insurance policy, whether term life or permanent life, find out what the incontestability clause on your term life insurance policy implies. Dont be tempted into lying on the application so you can get away with cheap life insurance rates. Shop around and compare life insurancequotes first to get a low rate or youll risk cutting your beneficiaries a smaller check than they truly deserve.
by: Pat Cassidy
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