The Incontestable Clause in Life Insurance Contracts

The incontestable clause typically is stated as follows:

We will not contest the validity of this Policy, except for nonpayment of premiums, after it has been in force during the Insured’s lifetime for two years from the policy date. This Provision does not apply to any rider providing disability or accidental death benefits. 

So after the specified period of time (usually two years) starting on the policy date and running for such period of time during the insured’s lifetime, the insurance company is barred from challenging the validity of the contract. Stated in a more legalistic manner, the insurer is “estopped from contesting even a material or fraudulent misrepresentation in the policy.”

The incontestable clause provides a balance between the legitimate interests of the parties:

Insurer – The incontestable clause allows a reasonable time for the insurer to discover and resist fraud by the insured and/or applicant-policyowner and deny liability, repudiate the policy, and return the policyowner’s premiums.

Policyowner and beneficiaries – The incontestable clause avoids the necessity of a long, expensive, and uncertain litigation to prove the truth of statements made in the application for the policy while the insured was alive and to obtain the policy proceeds after the insured’s death.

In other words, the incontestable clause can be considered a statute of limitations on the insurer to investigate statements made in the application, for insurance, and deny coverage on the basis of that inquiry. Once the contestable period expires, even fraud will not vitiate the contract.

Planners should note that the typical incontestable clause will carve out certain exceptions. For instance, the insurer is not barred from resisting a claim if premiums are not paid.

Many clauses also except from the protection of the incontestable clause any accidental death or disability payable under a policy rider or exclude from the incontestable clause’s scope “war hazards” (where the insured is killed as the result of military service). Some policies will provide within the incontestable clause a statement that if the insured’s age is misstated, the amount payable will be appropriately adjusted.

There are also other reasons why payment under a life insurance contract may be legally refused in spite of the incontestable clause. If these are proved by the insurer, the policy will be void (i.e., there never was a valid contract with the proposed insured).

1. Fraudulent impersonation (i.e., someone, claiming to be the insured, signs the application and/or takes the physical examination using the insured’s name)—Either there never was a valid contract or if the contract was valid, it was with someone other than the insured. So the incontestable clause does not bar the insurer from contesting the policy even after the expiration of the contestable period.

2. Lack of insurable interest – If there is no reasonable expectation of benefit or advantage from the continued life of the proposed insured, the life insurance contract becomes a form of wagering or gaming. To prevent profiting on the lives of others, all states void a contract in which there was no insurable interest at the inception of the contract regardless of the contestable period expiring.

3. Procurement of the policy with intent to murder – Public policy will not allow a contract to come into existence where it was entered into with the express purpose of murdering the insured. “Where the contract falls, it brings with it all of its constituent parts” and so the incontestable clause, being “no more a part of the contract than any of its provisions” must fall with the contract.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

Leave a Comment