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What Is the Life Insurance Contestability Period?

Life Insurance Contestability Period

Your Life Insurance Contestability Period Explained

When you purchase a life insurance policy, you enter into a contract with the insurance provider. You expect that they will pay out your policy to your beneficiaries if you pass away. However, there is one small catch.

Your life insurance has a 2-year contestability clause. This clause gives the insurance company the right to dispute your claim and potentially refuse to pay out your policy if you die within two years of taking out the policy. 

This also means that if you pass away within these first two years, your payout may be delayed while the insurance company investigates your death.

The investigation doesn’t automatically mean your beneficiaries won’t receive the payout. If you were honest on your life insurance application, the investigation should result in your policy being paid to your beneficiaries. 

However, if you lied on your application, the insurance provider can deny your claim, and your beneficiaries will not receive any pay.

Why the Contestability Period Exists

The life insurance contestability period exists to protect insurance companies from false applications. Sometimes people lie on their life insurance applications to get a better rate. Other times, people may make an honest mistake on their application. 

For instance, someone may lie about not having a smoking habit or pre-existing condition on their application in order to get a policy that they would not legitimately qualify for. If that person dies shortly after taking out an insurance policy, this may raise suspicions from the insurer that the applicant was not honest about their health condition.

The contestability period allows the insurance company to go through your application and medical records to see if you lied or omitted any relevant information to get approved for your policy. 

If they find any discrepancy between what you stated on your form and your actual health status or lifestyle when you were approved for your policy, that could be grounds to deny your claim.

The claim can be denied even if the information they uncover is unrelated to how you passed away. For example, if you were killed in a bus accident but didn’t tell your insurance provider that you were being treated for a minor heart condition, that omission could be grounds for your claim being disputed even though the condition was not responsible for your death. 

How Often Are Life Insurance Policies Contested?

It is quite uncommon for life insurance providers to invoke the contestability clause and delay or deny a life insurance payout. Only approximately 1% of life insurance claims are delayed or denied by the insurance company

The contestability clause isn’t something most people taking out a life insurance policy need to worry about. However, it is important for you to understand the clause and its consequences before you finalize your life insurance policy. 

What Happens if an Insurer Disputes a Claim?

There are two things that can happen if your insurance provider successfully disputes your claim:

      1. They will pay out part of your policy to your beneficiaries. However, they will subtract the additional premiums that you would have had to pay over the life of the policy if the insurance company had known your actual condition or lifestyle.
      2. The insurance company will deny the claim and not pay anything to the beneficiaries.  This is most likely to happen when the new information would have resulted in the policyholder being denied approval in the application process.

What Happens if an Insurer Approves a Claim?

Suppose your policy is upheld after the investigation. In that case, your beneficiaries will receive the full payment they are entitled to plus the interest accumulated from your date of death to the date the investigation is complete. 

It is important to note that the interest you receive on a life insurance policy for a delay in payment is taxable. The beneficiary is responsible for paying any associated taxes. However, the money your beneficiary receives as a life insurance payment is not taxable

The Suicide Clause

Your life insurance policy also includes a separate but similar clause known as the suicide clause. 

The suicide clause is also active for the first two years you hold your insurance policy. If you commit suicide during that time, your beneficiaries will not receive a payout.  

Note that a suicide life insurance payout is possible as long as it has been two years since your policy was approved.

You need to disclose any mental health concerns when you apply for your life insurance policy. If you don’t, this could lead to your life insurance policy being void — especially if you pass away within two years of being approved. 

If you are experiencing suicidal thoughts or actions, please call the National Suicide Prevention Lifeline at 1-800-273-8155, and someone will be happy to provide you with support.

Honesty Is the Best Policy

The most important thing you need to do to ensure your beneficiaries receive the payout detailed in your life insurance policy is to be honest on your application. 

Saving a little bit of money on your premiums by hiding the fact that you’re a smoker is not worth it in the long run if it means your beneficiaries don’t receive a life insurance payout. 

Answer the questions on your application as honestly as possible. As long as you do, your beneficiaries will receive a payout, even if you pass away during the contestability period.

Even if you survive two years after completing your application, you’re not off the hook. You can still be penalized for making a false claim on your life insurance after the contestability period. If your life insurance provider discovers that you lied on your application, they can pursue legal action against you and try to charge you with insurance fraud. 

No matter the circumstances or how long you live, lying on your life insurance application is never a good idea. 

Tips for Avoiding Errors on Your Life Insurance Application

      • Read the questions thoroughly
      • Ask for clarification if you don’t understand a question
      • Complete the application, put it aside, and review it a few days later with a clear head
      • Have a loved one or physician review your application for errors

Featured Image: Twenty20

About the author: I am a writer and an editor with experience in publishing, research, and SEO strategies. I have an honors BSc in Social Work from the University of Benin, Nigeria.

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