What Is A Life Insurance Contestability Clause?

The ‘contestability clause’ in a life insurance policy specifies a short window in which insurance companies can investigate – and deny –  potential claims. It could impact you, and at the very least, you should know the ins and outs of how it works.

The contestability period runs for two years in most states and one year in others, and it begins as soon as a policy goes into effect. If the insured dies while the policy is ‘contestable,’ and under questionable circumstances, an insurance company will thoroughly investigate the claim before they’ll release any proceeds to beneficiaries.

An insurance denial based on the contestability clause is far more common than you think.

In fact, everyone who buys a policy – regardless of their wealth or social status – is subject to the same contestability period and any distribution of their life insurance proceeds to their beneficiaries can come under the scrutiny of the life insurer should issues arise before the contestability period ends.

If you need an example which features a famous case study, you need look no further than the accidental death of actor Heath Ledger.

Ledger died of a drug overdose in 2008, and his death occurred a scant seven months after he purchased a policy, and that raised  a red flag for his insurance company. The company in question initially refused payment. They claimed the actor’s death may well have been a suicide. Though the coroner ruled his death accidental and eventually settled for an undisclosed sum, the case is an excellent example.

Ledger had insured himself to the tune of a $10 million policy. As a standard part of any life insurance policy, the two-year contestability clause gives insurers the right to challenge or refuse a claim , and in this case, contestability window was still open.

Had Ledger’s death been ruled a suicide, the company would have surely refused payment to his beneficiaries as his death occurred within the two-year “contestability period.” Inaccurate, incomplete or missing information on his application would also have provided grounds to deny payment to his beneficiaries. If Ledger had died more than two years after buying his policy, the contestability clause would no longer have been in effect and the payout to his beneficiaries would have been granted automatically. The payout would have occurred in that case regardless of the manner of his death.

“They can if they so desire – if they believe the circumstances are such – contest a death benefit up until two years after the issue date. 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,” said Brian Ashe, Treasurer of the Life and Health Insurance Foundation.

Ashe, CLU, has been in the insurance and investment business since 1969. He assists clients with life, health, disability income and annuity products, and his work is concentrated in estate conservation, retirement planning, employee benefits and business insurance. He’s currently Treasurer of the Life and Health Insurance Foundation for Education.

The contestability clause is an often-overlooked part of life insurance as few buyers expect to die within two years of purchasing their policy. That’s why the Ledger case is a precise example of why it’s important to understand the potential impact of the clause before buying a policy. If you and your beneficiaries are clear on how the contestability issue is handled by your insurance company, you’ll be better off for the long haul.

When in comes to life insurance coverage, knowledge is power. Take the time to educate yourself – and your beneficiaries – about contestability clauses before buying a term life insurance policy since every contract and insurance company handles the payout period of a death benefit differently.

Just ask David Theile, a Director for Life-Health Product Management at State Farm.

“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,” Theile says. “This insures they understand what circumstances might cause a death benefit not to be paid.”

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