The Incontestability Clause of Your Life Insurance Policy

Regardless of the life insurance policy you decide to purchase, every policy will contain a safeguard called the “incontestable clause” geared towards financially protecting the insurance company.

The National Association of Insurance Commissioners Standard Policy Provisions Model Act and the laws based upon it requires that every single policy contains an incontestable clause, which is a provision that makes the life insurance policy incontestable by the insurer after it has been in force for a certain time of period.

It was first introduced in 1864 in the state of New York by the voluntary actions of insurers. It gained so much attention that by 1906 it was made mandatory by New York law. The clause proved to be very beneficial to both the public and to the insurance companies.

Due to the overwhelming success of the measure, other states quickly followed, and now the clause is required by statute in all states. While the laws in every state may differ as to the form of the clause, no state permits a clause that would make the policy contestable for more than two years.

A sample incontestable clause may read:

“Except for nonpayment of premium, we will not contest this contract after it has been in force during the lifetime of the insured for two years from the date of issue.”

This means that after a policy has been in effect for the period of time prescribed by the incontestable clause (normally two years), the insurance company cannot have the policy declared invalid and thus must pay out.

However, the courts gave three general exceptions to this rule.

  • If there was no insurable interest at the inception of the policy
  • If the policy had been purchased with the intent to murder the insured
  • If there had been a fraudulent impersonation of the insured by another person

If any of these exceptions were true, then the incontestable clause would not apply because the contract was void from its creation.

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For example, say a husband took out a life insurance out on himself for $500,000 to help protect his family in the event of his death. Unfortunately, the husband was suffering from a health condition that would either render him uninsurable or would suffer a high premium.

During the underwriting process, the husband was well aware of his health condition, so in order to get a better rate, he had his healthy brother take the medical examination. The husband then died from said health condition four years after the policy went into force.

After the death of her husband, the wife submitted her husband’s death certificate to the insurance company to receive the insurance proceeds. However, during the regular investigation of a death claim, the insurance company discovered the insurance fraud and impersonation.

The question is –  does the insurance company have to pay out the death claim?

No, the contract was void from creation because of the fraudulent impersonation at the physical examination. By having the brother take the examination, the husband committed insurance fraud and rendered the policy void.

If there had not been any fraudulent activity but mere concealment of health information, then the policy would have been voidable until the end of the contestable period.

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