The contestability period is a vital clause in a life insurance policy which every policyholder should know in detail. It starts from the date of issuance of policy and lasts for a duration of two years. Even though the buyers often tend to ignore the contestability period while signing the policy papers, it significantly impacts the beneficiary claims that are made before the completion of this period. Read through the page to know about some of the vital aspects of this clause.
What is the contestability period in life insurance?
The contestability period is a clause in a life insurance policy according to which if the policyholder expires within two years of purchasing the policy, the insurance company can contest or question the claim raised by his/her beneficiaries. In such cases, the insurer will have the right to ask for verification of the personal details of the buyer. This clause enables the insurers to deny or cancel a claim made before the completion of two years from the policy date. In certain cases, they even have the right to withhold parts or the entire benefit payment from the beneficiaries. Some companies also have a clause according to which if the policyholder commits suicide within two years from the policy issuance date the beneficiaries cannot claim the death benefit. They will straightforwardly deny if any claims are made in similar instances.
How the customers usually breach the contract?
There are various ways how customers usually breach the contract. Lying about one’s medical condition, past health status, dangerous job profile, unhealthy habits, drug abuse, and other addictions are considered as discrepancies. Here is an example to help you understand it better.
Suppose you are a chain smoker or addicted towards alcohol but while buying your life insurance policy you falsely represented that you don’t smoke or drink. Now, unfortunately, if you die within 2 years of purchasing the policy, the company will have the right to investigate your past in order to verify the authenticity of the information provided by you at the time of policy purchase. In case you are found to be guilty of providing wrong information the company will have the authority to deny the insurance amount claimed by your family members/beneficiaries.
What is the significance of the contestability period?
The insurance companies often come across cases where the buyers provide inaccurate or false personal information about their lifestyle, health, and job nature with an intent to mislead the insurers. Since the cost of premiums of a life insurance is based on the age and the medical history of the insured, there is a high possibility that the customers in order to reduce the cost of the premium, may tend to give false or inaccurate information regarding their health and lifestyle. Hiding hazardous occupation, unhealthy habits, drug abuse or addictions, risky hobbies, etc. are some of the areas where a customer can possibly lie to mislead the insurers and thereby, reducing the premium rate. This is where the clause of contestability comes into play.
The main purpose of including this clause in the life insurance policy documents is to protect the companies against fraud claims. It allows the insurer to evaluate and investigate the medical history of the customer and find out the credibility of the information provided at the time of insurance policy purchase. In this way, it not only safeguards the insurers against discrepancies but also gives them a fair chance to question the authenticity of a policy claim.
How is a claim contested by the insurance companies?
While contesting a claim the insurance company at first investigates the authenticity of the claim by checking the medical history and other personal documents of the customer. In the process, if the company gets hold of any evidence that proves misrepresentation or breaching of contract by the insured, it can deny or cancel the claim. There is no fixed time of investigation and it can vary according to the circumstances. While some investigations may take a few days others can linger up to weeks or months.
What can happen if the company contests a claim?
Misleading the insurer by providing inaccurate information is a matter of breaching and in such cases the company holds the right to check the authenticity of the insurance claim. Such contested claims are usually settled by the insurance companies in the following ways:
In case of authentic claims
If the information provided by the policyholder in the application form is found to be true, the insurance company approves the claim while also giving interest along with the total payout to compensate the delay caused due to the contestation process.
In case of information breach
- The insurer usually pays the death benefit to the beneficiaries after deducting the additional premiums that would have been charged if the actual information was provided at the time of purchase. For instance, in case of a smoker or an alcoholic, the extra amount that he/she would have actually paid as premiums will be deducted from the total amount of death benefit.
- Alternately, in certain cases the company can completely deny the claim and give the premiums back to the beneficiaries. However, the insurance companies take such strict actions only in cases where the new information gathered about the policy holder’s medical history, health, job nature, etc. are beyond the coverage of the policy.
What are the changes that take place after the contestability period?
Here are the changes that ideally take place in a life insurance policy after the contestability period is over:
- After the completion of the contestability period, a life insurance policy becomes incontestable. This means the beneficiary will receive the entire coverage amount as long as the policy is in effect. However, in some policies, there might be certain exclusions where the beneficiaries don’t get paid.
- If the coverage of your life insurance policy lapses, the new contestability period will start only when you reinstate or purchase a new life insurance policy. While buying the new policy make sure to provide only correct information to avoid future hassles.
Vital points to know about the life insurance contestability period
Some very important points that you should know about the contestability period of your life insurance policy are as follows:
- Being untruthful on your life insurance application form for getting premiums at lower rates can be dangerous for your loved ones after your death. If you lie on the life insurance application form thinking that you will be able to live through the contestability period, it can lead to denial or cancellation of the policy claim after your death. Since you are taking the policy to secure the future of your family members when you will be no more to take care of their financial needs, make sure that no information provided on the application form is false or inaccurate.
- Even though the insurance companies have the right to investigate and verify any claim made during the contestability period, they still will have to pay the death benefits to the policyholders’ family if the accuracy of the information is proved.
- If you die during the contestability period, your family might have to wait to get the money for quite a long time until the company investigates the matter and is satisfied with the outcome.
Now that you know everything about the life insurance contestability clause, make sure to furnish only the correct information about your health and medical status while you are buying a life insurance policy. Remember, honesty is the key to get through the life insurance contestability period clause. If you are honest at the time of purchasing the policy your family will get the money even if you die after one hour of buying the insurance cover.