By Mike Mosser, Life Quotes, Inc. Staff

When you purchase a term life insurance policy or a whole life insurance policy, the policy remains contestable for several years following the issue date. In simple terms, if the insurance company receives a claim shortly after the policy was issued, the company has the right to rescind the policy or deny a claim if fraud is suspected.

Reasons why you might be denied a life insurance claim based on contestability

• You start an “extreme sport” before the contestability period is up and you don’t tell your insurance company.
• You are transferred to a new job in a foreign country that falls under the warning list issued by the U.S. Department of State asking Americans not to travel to those countries because of “unrest,” “extreme instability,” “war,” or “Anti-American” attitudes.
• Fraudulently misstating your medical condition.
• Lying about a mental illness.
• Lying about drug use (legal or illegal).
• Lying about tobacco use.
• Misstating your occupation (a good example is saying you are just a truck driver when in fact, you drive a truck carrying explosives).
• Misstating your age. If the insurance company finds this out they may reduce the benefit to reflect the premium you should’ve been paying based on your age.
• Suspicious dealings involving “stranger-owned life insurance” where someone talks someone else into letting them take an insurance policy out on them that they offer to pay for until you give them all ownership rights.
• You die under suspicious circumstances before the period ends.
• Your death is ruled a suicide by the coroner.
• The person who took out the policy on your life is suspected of murdering you.

Source: Compiled by Life Quotes, Inc. Staff

If you should die while the policy is contestable and under questionable circumstances, the insurance company will thoroughly investigate the claim before they will release any proceeds to your beneficiaries, explains Edward E. Graves, insurance expert and author of “McGill’s Life Insurance.”

An insurance denial based on the contestability clause is far more common than you think.  Even celebrities and the distribution of their life insurance proceeds to loved ones are under the scrutiny of the life insurer if something  happens to them before the contestability period ends.  A good example of this is actor Heath Ledger.

In Ledger’s case, he died of a drug overdose in January 2008—just seven months after he bought the policy. This would be an instant red flag for an insurance company.  His insurance company initially refused payment and claimed his death could have been a suicide, even though it had been ruled accidental. The company eventually settled the case for an undisclosed sum.

Although Ledger insured himself to the hilt with a $10 million policy, his life insurance company tried to toss those proceeds out through the contestability window after his death. As a standard part of any life insurance policy, the two-year contestability clause gives an insurer the right to challenge or even refuse a claim.

The contestability clause provides the insurance company with a window of time where it can dispute the validity of the contract if they suspect fraud, concealment or misrepresentation on the insurance application. If the life insurer has not rescinded or terminated the policy after the contestability period, they cannot rescind the policy or deny a claim.

“They can if they so desire, if they think that the circumstances are such, contest a death benefit up until two years after the issue date,” says Brian Ashe, Treasurer of the Life and Health Insurance Foundation. “Once they get beyond two years they can’t, so the contestability clause and the suicide clause begin all over again when they get a new contract.”

If Ledger’s case had been ruled a suicide, the company would’ve had the right to refuse payment to his beneficiaries because he died within the two-year contestability period. Likewise, if there had been any inaccurate or missing information on his application, the company could have denied payment to his beneficiaries even if the information had no impact on his death.

On the other hand, If Ledger had died after two years of buying that policy, the contestability clause would’ve no longer been in effect and payout would’ve been granted automatically—regardless of the manner of his death or any other issues.

The contestability clause is an often-overlooked part of life insurance, as few buyers would say they expect to die within then next two years. The Ledger case offers an example of why it’s important to understand its potential impact before buying a policy—and to be clear on how this issue is handled by a company and the policy it provides.

It’s worth your time to always ask about contestability clauses before buying a term life insurance policy since every contract and insurance company has different ways of handling the payout period of a death benefit.

“It’s important for customers to understand the contestability clause and what the provisions in the contract are in case the policyholder dies during that period,” says David Theile, Director in Life/Health Product Management at State Farm. “This insures they understand what circumstances might cause a death benefit not to be paid.”

This article was originally published by Life Quotes, Inc.