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Probably one of the most misunderstood parts of life insurance is the incontestability clause and what it really means. The question from clients is most often framed something like, “How long does the policy have to be in force before it pays?”

There are guaranteed issue policies that truly have a waiting period before they will pay a death benefit, usually 2 or 3 years, but that is different from the 2 year incontestability period in a traditional policy. The following attachment is the clause as it appears in most policies.

incontestability-clause

A couple of important things to note. Statements (or answers to questions) in the application can be used to contest or defend a claim. If you fail to mention something in the application that is relevant to the life insurance policy and how it was approved and issued, it can be used to contest payment of the policy if you die during the first two years. That is why I have stressed so often in this forum that you really can’t be too honest when it comes to sharing health history with your agent. It not only helps them find you the best rates, but protects your interests during the incontestability period.

The other thing that is important to note is the statement that the company will not contest the policy after it has been in force for two years.

It isn’t unusual for a person to honestly not remember every detail of their health history or to accidentally leave some small detail out. While this may ruin most people’s image of life insurance companies, they really aren’t looking for a way not to pay claims. They are protected from material misrepresentation through the two year clause, but the remedy if they find some inconsistency is not always to void the contract and not pay the death benefit.

Hypothetically let’s say a person gets approved for a $250,000 policy and its’ cost is $1000 a year. The person dies after a year and the company reviews all of his medical records and finds new information that wouldn’t have precluded them from issuing insurance, but would have moved them to issue the policy a higher premium, say $3000 a year. The company then has a choice. If they believe it was an attempt to commit fraud and the additional health information contributed to or caused his death, they might deny the claim. If, however, it was simply an oversight on the part of the insurance company during initial underwriting, or if the information would have led to a higher rate but didn’t contribute to the death, the other remedy the insurance company might use is to adjust the premium. In that case they would change the premium to $3000 for the year it was in force and deduct the difference from the death benefit making it $248,000.

I think it is also worth noting that suicide is covered after two years, not because I think people should buy insurance for that purpose, but because there are a lot of claims that go unpaid because beneficiaries assume companies won’t pay in the event of suicide.

Bottom line. Know your policy. Always tell the truth and don’t leave out even small details.