Life insurance brings a lot of mind comforting notions with it. It helps many people sleep soundly at night knowing that they need not worry about what happens to their family or loved ones if they should meet an untimely demise. But what happens if you recently put your coverage in place and you don’t live beyond the life insurance contestability period?
Do you need to worry about the insurance company’s not paying the claim to your beneficiary? What if you fibbed a little bit about how great your health was? Or what if you find out not long afterwards that you weren’t quite as healthy as you thought you were?
Can the insurance company use any of that against you to deny the claim?
The Contestability Period
The contestability period is a time of your life insurance contract during which the life insurance company can contest the payment of the death benefit. Technically, what they are really doing is attempting to void the contract by proving their was a material misrepresentation that induced them to enter into a contract that they would have otherwise not entered into.
Most insurance agents learn that the contestability period is a period of two years that follows the inception of the policy. And this broad definition is pretty good for illustrating the general point. But there is certain nuance that is helpful, and we’ll be looking at that. But first defining some specific vernacular is in order.
The statements made by an applicant (and the writing agent of a contract) are considered representations. The legal significance of this is pretty deep and for our purposes we’ll only scratch the surface. Understanding that this classification has a much looser significance on absolute fact is an easy way of understanding the significance from a cursory point of view.
In other words, the fact that these statements are considered representations and not warranties means you the applicant have no legal obligation (in the sense that you would be required to indemnify the insurer for incorrect information) to their validity. It also means that you are not attesting that something is a certain way and will always remain that way (i.e. you do not presently use tobacco products, but you make no promises that you never will).
Equity as a legal concept is something largely lost in the United States. Attorney’s understand the term, but few laypeople do. Equity suits are suits brought against a party to enforce a contract. For example, if an insurance company refuses to pay a claim, you’d likely bring equity suit against the company to make the company pay the death benefit (i.e. enforce the contract agreement). Alternatively legal remedies seek to recover damages sustained by a party. From our prior example, you may bring legal suit against the insurer for losses sustained while trying to enforce the contract.
Rescission is the process of voiding a contract. Keeping within our insurance framework, an insurance company may attempt to rescind a contact after learning that a material misrepresentation took place that would have prevented them from entering into the contract in the first place.
The Evolution of the Contestability Clause
All normally underwritten life insurance contracts include a contestability clause. This is generally found near the beginning of the contract under general information sections and it speaks to the length and details of the contestability period. In most states this is a period of two years (except Missouri where it’s 1 year). But there is some nuance to the period that has evolved over time.
Originally, the clause read something to the effect of, “the policy will be contestable for a period of two years after the policy date.” And this seems straight forward enough, but it contains a subtle loophole that was unearthed by an astute beneficiary and/or his or her attorney. The insured died within the first two years, but the beneficiary waited until the two-year period came to an end to file the claim.
This move of sheer genius proved fruitful as the courts ruled in favor the beneficiary and required the insurer to pay the claim as the contract very specifically stated that the insurer could no longer contest the claim (for those interested in the minutia, this is commonly referenced as the Monahan Decision).
Today, most contestability clauses include language that states the period is for two years after inception of the contract during the life of the insured. Meaning the death of the insured suspends the contestability period clock.
So what happens if Death Occurs During the Contestability Period?
In the case of a death during the contestability period, the insurer will certainly take some time to investigate facts and ensure there are no grounds for contract rescission. This is, of course, a matter of prudent business practices. There are however, a few important details that have a huge impact on future options regarding the original contract. And since the insurance company typically has the advantage of knowledge, we figured we’d level the playing field by equipping the general public with some background information.
Suicide: the Type of Death Matters
Most agents don’t realize there is a significant difference between ruling a death a suicide and contesting the death benefit. Sure there are two different provisions within the contract speaking to suicide and to contestability, but most agents neglect to note the differences because the end result is the same.
For some slight background, the suicide clause generally runs for the same period as the contestability period. If an insured commits suicide during the suicide period, all of the premiums paid under the contract are refunded, which is exactly what happens if a death benefit is successfully contested and a contract rescinded. After the suicide period, the contracts stated death benefit must be paid if death is the result of a suicide.
But, there is technically a huge difference between the return of premiums for a rescinded contract and return premiums for suicide within the suicide period. Contesting and rescinding a contract voids the contract and creates a circumstance as if the contract was never entered into—as such the premiums need to be returned. Refunding premiums under the suicide provision is considered a payment of the death benefit stipulated under the suicide provision.
Subtle Difference, Huge Consequences
This seemingly insignificant difference makes a huge impact on the corner an insurance company may back itself into if it determines that the insured died by suicide and does not choose to contest the death benefit. A hasty decision to rule death a suicide and pay the death benefit (refund of premiums) is—according to prevailing legal opinion—an admission that there is nothing to contest.
This means, if the beneficiary can than prove that the insurance company is wrong, and the death was not by suicide, the insurer has no choice but to pay the full death benefit.
And how might the beneficiary prove that death wasn’t by suicide? There are a number of different circumstances that might make this possible, one of the easiest is by appealing to a medical examiner to change his or her original determination regarding cause of death—more common than you might assume.
Suicide is Just One Example
If an insurer attempts to contest a death benefit based on one specific theory and is wrong about that theory, and the beneficiary can prove this, but there really was grounds to rescind the policy the insurer simply missed the truth, going back and starting over with the real reason to contest the death benefit is generally not permitted. For this reason, insurers will traditionally take their time to gather as many facts as possible, and be as broad as possible when it comes to contesting a death benefit and denying claim.
What you need to Know
There are numerous things taking place during a claims investigation for a life insurer during the contestability period. The reason they do these things, and what could result from them are important. And knowing why they take place and what may result is very helpful.
In several circumstances the insurer may choose to interview the beneficiary to collect information. Keep in mind that information disclosed to the carrier could be used to contest the payment of the death benefit. I’m not suggesting that any beneficiary play hardball, but what I would suggest is that you answer only the questions that are asked of you.
Consult the Original Application
If the insurer attempts to contest a death benefit, make sure the grounds on which they attempt to contest it are nowhere in the original application. For the insurer’s and applicant’s protection almost all life insurance contracts include the original application in the policy contract. This helps to establish what the insurer and the applicant knew when they entered into the contract.
For example, lets say an applicant admitted to having a TIA (transient ischemic attack, also referred to as a mini stroke) in the application, was issued life insurance, and died of a CVA (cerebrovascular accident, aka stroke) within the contestability period. The insurer decides to contest the death benefit and claims it did not know about the stroke history. The disclosure is clearly found within the application, and this information can likely be used to deny the insurance company’s attempt to rescind the contract.
Consult the Underwriting History and any Disclosure
This one is a good bit tougher, but still worth the effort. Let’s go back to our TIA example above and further note that the carrier that issued life insurance had reviewed the applicants attending physician statement (APS, or medical charts as recorded by his or her doctors seen). Within the APS it was disclosed that the patient had a considerably high ABCD² score following the TIA.
The fact that the APS was ordered, and the fact that this information existed in the APS could be used to deny the insurer's ability to rescind the contract. The technical detail here is that insurers typically cannot use information they knew of but discounted or information that they should have reasonably known but for some reason did not account for to later contest a death benefit.
This is also true, and important, in cases involving a contestability period resulting from policy reinstatement. When a policy is reinstated (happens when a policy lapses due to non-payment and is reinstated at the original issue age, but does require medical underwriting to prove eligibility for coverage) a new contestability period is started at the reinstatement date. Information disclosed in the original application and in the reinstatement paperwork could all be counted as information known to the insurer.
How does one get this information? That is sometimes a tricky question, but a good agent can be very helpful on this end. Records on underwriting requirements can be tough to find, but some of us keep records on this for reasons related to this and other considerations.
A Quick Legal Note
If you’re in the process of dealing with a contested death benefit, please consult professional legal counsel and understand that none of the above is intended to act as a surrogate for such counsel.
I’d encourage anyone in this situation to seek legal advice from an attorney with a strong background in contracts law before answering any questions posed by an insurer.
If you’re having trouble locating an attorney, we have a few relationships with individuals who may be able to lend a hand.
Also take note; while an investigation can appear daunting, life insurers tend not to contest death benefits unless there are egregious misrepresentations. Quibbling about minor details that relieve an insurer on a small technicality doesn’t generate loads of good will and they know this. Still, it’s prudent to be prepared and understand what options you have at your disposal when facing life insurance contestability.