What is an Incontestability Clause?

After a certain length of time has passed, and incontestability clause in most life insurance plans prevents the provider from voiding coverage due to the insured's misstatement. A typical incontestability clause states that a contract cannot be cancelled because of a misstatement after two or three years.

Incontestability clauses safeguard insured people from companies who try to avoid paying benefits when a claim is made. While this clause is advantageous to the insured, it is not sufficient to guard against outright fraud.

One of the strongest protections for a policyholder or beneficiary in life insurance policies is the incontestability clause. While many other insurance-related legal rules favour insurers, this one stands out as being particularly pro-consumer.

Conventional contract law states that if one party provides false or incomplete information during the contracting process, the other party has the right to void, or cancel, the contract. Insurance companies cannot do this because of the incontestability clause.

1. In most states, if an insured individual lies about his or her age or gender while applying for life insurance, the insurer may not cancel the policy, but it may change the death benefits to reflect the policyholder's true age.

2. Some states enable insurers to incorporate a clause stipulating that a one- or two-year contestability period must be completed during the insured's lifetime. In this case, a life insurance company may refuse to pay benefits if the insured was so ill when they filed for coverage that they died before the contestability period expired.

3. In some places, if purposeful fraud is established, an insurance provider can terminate a policy.

When applying for life insurance, mistakes are easy to make. Before approving a policy, an insurance company will frequently ask for a thorough medical history. If an applicant overlooks even one element, the insurance company may be justified in refusing to pay life insurance benefits in the future.

The incontestability clause was first established in the late 1800s by reputable insurance companies to increase consumer trust. These insurance companies attempted to improve the industry's reputation by pledging to pay full benefits after the policy had been in effect for two years (even if the original application contained errors). The effort paid off, and state legislatures began enacting laws requiring the incontestability clause in the early twentieth century.

When a life insurance policy is obtained today, the clock starts ticking on the contestability period right away. If the insurance company has not discovered an error in the original application after two years, benefits will be guaranteed.

It's difficult for a corporation to revoke a policy even within that time frame. To have a contract nullified, most states require the insurance company to file a lawsuit. It is insufficient to just send a notice to the insured.

When applying for life insurance, mistakes are easy to make. Conventional contract law states that if one party provides inaccurate or partial information during the contracting process, the other party has the right to void, or terminate, the contract. Before approving a policy, an insurance company will frequently ask for a thorough medical history. If an applicant overlooks even one element, the insurance company may be justified in refusing to pay life insurance benefits in the future. This is made impossible by the incontestability clause.

In most states, if a policyholder lies about his or her age or gender, the insurance company can change the policyholder's death benefits to reflect the true status of the policyholder. If a policyholder was so sick when they filed for coverage that they died before the contestability period ended, a life insurance company has the right to refuse to pay benefits. If purposeful deception is established, an insurer in some states can terminate a policy.