There is an urban myth about life insurance contestability that needs to be laid to rest. Not understanding how the suicide and contestability clauses work can lead to unpaid claims and unscrupulous replacement of perfectly good policies.

Let’s deal with contestability first. Every policy has, by law, a two year contestability period from the date it goes into force. During that period the company has the right to reopen underwriting to see if they missed something in underwriting or there was something that was materially misrepresented. The gist of material misrepresentation is that it would have changed the outcome of the underwriting if the insurance company had been told the information.

The contesting of the policy, depending on the outcome, can result in one of three actions in relation to the death benefit. First, and this has been the result in every policy I’ve been the agent on, the investigation is completed in a timely manner and the death benefit paid in full plus interest from the time of death.

The second scenario is if the company determines they would have issued the policy but find information that would have changed the amount charged for the insurance. In this case they would pay the benefit minus the premium that should have been paid. The third outcome is rare, but if the company finds that they either missed something or you misrepresented something that would have led to a decline of the application, all premiums are returned to the beneficiary, but no death benefit is paid.

I’ve had plenty of people insinuate that because the company gets the opportunity to review the underwriting, of course they are going to come up with some reason to decline to pay the death benefit. I’ve had a number of clients die during the contestability period and all of the policies were paid in full with interest. It is rare for a company not to pay. The contestability period simply protects the company from fraud.

I had a client call today who will be taking a job in Afghanistan. He found me on a search for life insurance for civilian workers in Iraq or Afghanistan. After talking with him he said that he had $2 million in force but was afraid that it would not cover him working in Afghanistan. He said it was two policies that had been in force 6 and 8 years respectively. I assured him that because of the contestability clause being two years, he was fully covered by those policies no matter where he died. I actually followed up with his company to confirm it for him. They said no question, even if he had joined the military, he was fully covered. He is looking at additional accidental death and dismemberment and disability income through me.

So, in force policies beyond the contestability period are good to go for future endeavors. Beware the unscrupulous agent that just doesn’t mention that in order to write more new coverage. Really!

As to the suicide clause, it is pretty self explanatory. The clause allows a company not to pay a death benefit if a person commits suicide in the first two years (one year in a few states). The company would pay the beneficiary a refund of all premiums. But another urban life insurance myth is that life insurance doesn’t pay in the case of suicide. After the one or two years it absolutely does. Something I’ve posted about numerous times is that often claims aren’t filed because of a lack of knowledge about the fact that the company will pay and sometimes just out of a sense of shame. File the claim! If you have a friend who has had a spouse commit suicide, understand that their grief process probably isn’t leaning toward looking at life insurance. Help them out!

Bottom line. Read your policy or your spouse’s policy and understand these two clauses. They are meant to protect the insurance company but they are also meant to protect the insured.

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