Can a life insurance company deny a death benefit claim if they discover an applicant misrepresented key information when applying for coverage?
What happens if you or your agent make an honest mistake that’s not discovered until after your death?
After all, life insurance is a legal contract. Laws governing contracts often allow one party to void an agreement if it was reached under false assumptions, whether intentional or not.
Life insurance policies, however, aren’t treated exactly like other contracts. To address the potential for inaccuracies and outright fraud, life insurance contracts contain both an incontestability clause and contestability period.
Incontestability clauses are designed to protect the person being insured. They prevent insurance companies from contesting a death benefit claim after a policy has been in force for a certain period of time.
The basis behind this clause dates to the early history of life insurance, when unscrupulous companies would often refuse to pay claims by accusing the insured of lying on the application. Insurers would also use unintentional mistakes on the application as a basis for denying a benefit claim.
Reptuable insurance companies and, later, state governments imposted incontestability clauses to better ensure that policies paid contractual benefits.
But life insurers still have some protection against fraud and misrepresentation. That’s why policies typically contain a contestability period.
The provision gives the insurer the ability to investigate the insured’s death if it occurs within the first two years of the policy. If the insurance company finds deception on the application, it can potentially deny the death benefit claim.
But if the insurance company investigates and finds no wrongdoing, then it must pay your contractual death benefit.
Not all deaths within the contestability will be investigated. For example, an insurer likely won’t find any wrongdoing if the insured died in a car accident.
But if the cause of death was a heart attack, the claims examiner might conduct more research to determine if the insured had heart disease and knew of the condition during the application process.
It should be pointed out that contestability is not the same as the suicide clause found in life insurance policies, though there are similarities.
Under a suicide clause, the insurance company will not pay a death benefit if death occurs by suicide within the first two years of the policy. Instead, the company will refund premiums. After two years, the policy will pay out even if the cause of death is suicide.
If the insurer does find that you obtained coverage based on false underwriting information, it may typically take one of two actions.
You may receive a lesser death benefit based on the amount of coverage you would have received had the insurer knew the truth.
For example, say you used tobacco for many years but neglected to put that in your application and it did not come up during medical exams. As a “non-tobacco” user, you received coverage for a $100 monthly premium. Had the insurer known you used tobacco, it would have charged you $200 a month in premium. If you die during the contestability period and the insurance company discovered the discrepancy, it could decide to pay you half your contracted benefit since you essentially paid half the premium you should have.
If the discrepancy was egregious or outright fraudulent, the insurance company also has the option of completely denying a death benefit claim and simply refunding premiums paid.
If a discovered inaccuracy found during the contestability period was due to an unintentional error, the insurer may reduce the death benefit based on the coverage the insured should have received. But in many cases, an error will not effect the death benefit, especially if it had no relation to the cause of death.
The main thing you want to understand about contestability is that you should not, under any circumstances, knowingly lie on your life insurance application. Doing so puts your beneficiaries at risk of losing the death benefit. Typically, a successful denial by the insurance company means that it only has to repay the premiums paid, not the contractual death benefit.
Even if you die after the contestability period expires, Some states allow the insurance company to still void the policy if deliberate life insurance fraud can be proven.
Also keep in mind that the vast majority of policies pay claims with little dispute or delay. Data from the National Association of Insurance Commissioners show that less than 1 percent of new death benefit claims are disputed by insurers.
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Joel Palmer is a writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.