Contestability Periods: What You Need to Know

Every life insurance policy issued in the United States contains an incontestability clause. To make sure of this, every state in the nation requires an incontestability clause in its laws that say what provisions must be included in a life insurance policy. These laws state that a life insurance policy is incontestable after it has been in force during the insured’s lifetime for two years from its date of issue.

What about during those first two years? During that contestable period, the insurance company could allege that some error was made in the application for the policy, and the policy shouldn’t be enforced. They don’t have to be proactive about it either. They can sit around collecting premiums, and if the insured should happen to die during the contestability period, they can then proceed to scrutinize the application and look for some reason to rescind the policy.

If they are able to cancel the policy, they must refund the premiums paid, but they won’t have to pay the benefit. Note that not every reason the insurance company gives for contesting or rescinding the policy is applicable; they might try to cancel a policy based on some minor technical error that didn’t impact their decision to issue the policy. In that case, you might be able to get a lawyer and fight their denial, and even hold the insurance company liable for a bad faith rescission. If they were found to have acted in bad faith, not only can you get the benefits owed on the policy, but you can recover other legal damages as well, such as economic costs, emotional distress, and attorneys’ fees in some jurisdictions.

It’s not that hard to make a mistake when filling out an application for life insurance. Insurers require you to provide a detailed medical history, most of which is self-reported by you. You could forget to include some detail about your past, omit something that seems minor to you, or in good faith misstate the nature or extent of some condition you have or had. If insurers discover such a mistake and it was material to their decision to issue you a policy at a given premium or benefit, then they might be entitled to rescind the policy, but only during the two-year contestability period.

Contestability Laws Around the Nation

Every state, from Alabama to Wyoming, has a statute prohibiting a contest outside of the contestability period and requiring every life insurance policy to include an incontestability provision. But not every statute is written precisely the same. For instance, here are Alabama and Wyoming:

Alabama

There shall be a provision that the policy, exclusive, at the option of the insurer, of provisions relating to disability benefits or to additional benefits in the event of death by accident or accidental means, shall be incontestable, except for nonpayment of premiums, after it has been in force during the lifetime of the insured for a period of two years from its date of issue.

Wyoming

The policy, exclusive of provisions relating to disability benefits or to additional benefits in case of death by accident or accidental means, is incontestable, except for nonpayment of premiums, after it is in force during the insured’s lifetime for a period of two (2) years from its date of issue.

These two laws actually do say about the same thing, although with slightly different wording. The key provisions in each law are:

• Every policy must have a provision stating it is incontestable two years after it has been issued
• An exception exists for nonpayment of premiums; policies can be canceled at any time for nonpayment
• The contestability provision does not have to apply to claims based on disability or that provide additional benefits for accidental death

Accidental death and disability (AD&D) policies can be excluded because the purpose of the contestability clause is to protect insurers from having to cover people who applied for insurance knowing they didn’t have long to live but concealed that fact from the carrier. If an individual applied for AD&D insurance while withholding the fact that they like to skydive, base-jump or pilot small aircraft, that policy could be contested at any time, even outside the two-year window. As the language of the statutes implies, it is left up to the carrier whether to extend their incontestability provision to AD&D claims or not.

The language in our examples is typical of most state laws. We reviewed them all, and every state confines the contestability period to two years and excepts nonpayment of premium, while the majority have an exception for total disability benefits and provisions granting additional benefits for accidental death.

In our review of the states, we also found a few less common provisions related to incontestability. These are as follows:

One fairly common provision makes it clear that incontestability only prohibits a contest to the validity of the policy; it doesn’t stop the carrier from asserting any other defenses it might have based on policy provisions that exclude or restrict coverage. If the policy excludes death due to military service, for instance, the insurer could contest the claim on that ground at any time, even after two years have passed since the policy’s date of issue. The incontestability law only applies to challenges that the policy itself is not valid, not that coverage does not apply based on the policy.

Speaking of military service, a few state laws do explicitly take provisions that exclude death during military service out of the incontestability period. Some laws limit this military service exception to wartime, while others don’t make that distinction.

A couple of states remove aeronautics from the contestability period, except for flying as a regular fee-paying passenger on a commercial flight.

More than a few states include a provision making it clear that if a current policyholder applies for an increase in coverage, a new contestability period is created from the point the updated coverage is issued. Some states clarify that this new period is limited to contests that are connected to the application for increased coverage and not the original application.

Many states carve out an additional exception related to misstatements of the applicant’s age or the age of some other person whose age was considered by the company in determining the premium or benefit. If these misstatements are found outside the contestability period, the insurer still can’t rescind the policy, but they can adjust the amount payable or benefit accruing to what the premium would have purchased had the individual’s correct age been submitted. In Wisconsin, their version of this law applies to misstatements regarding sex as well as age, and if the applicant’s actual age was beyond the insurer’s maximum age limit for issuing life insurance policies, then the carrier can refund the premiums collected and cancel the policy or refuse payment.

California holds that a reinstated policy can be contested on grounds of fraud or misrepresentation of facts material to the reinstatement, but only for the same period following reinstatement and under the same conditions and exceptions as the policy provides with respect to the contestability period allowed after the original issuance of the policy. One exception is that if the company requires a photo ID to be presented during the application process and an imposter is substituted for the named insured at any part of the application process, then the policy is considered void from its inception, and no contract was ever formed.

Some states make it clear that an applicant’s deliberate fraud renders the policy void at any time, even outside the contestability period, assuming the insurer can prove deliberate fraud. This could be a complicated matter, given that proving deliberate fraud requires knowing the applicant’s intent, and that person has likely expired by the time the insurance company makes its challenge. This raises the question again about whether the insurance company has a good faith belief that it was defrauded or is acting in bad faith to keep from paying on an otherwise valid claim.

Whenever any life insurance claim is denied by the insurer, it’s probably a good time to get an attorney to review the facts and see whether you have grounds to fight that denial, collect your benefits, and maybe additional damages if the insurer was acting in bad faith.