Life Insurance Contestability Period and Denial of Claims

One of the most difficult periods in anyone’s life is during the loss of a loved one. Unfortunately, further strain on the emotions of survivors may occur if the deceased person’s life insurance claim is not paid. This can happen for several reasons, but here we will focus on the contestability period and making material misrepresentations to the insurance company.

What Is the Contestability Period?

The contestability period is a period of time during which the insurance company can cancel coverage if it discovers that the policyholder provided misstatements or misrepresentations in order to qualify for insurance. If the insurance company determines that this has occurred, any amount that the policyholder had paid in premiums will be returned. In Illinois, the contestability period is two years, beginning on the date on which the policy goes into effect.

The contestability period provides insurance companies with a reasonable opportunity to discover any false statements made which caused the company to give coverage to an individual who ordinarily would not be given coverage. A policyholder whose death comes shortly after purchasing insurance will raise suspicion of the possibility for fraud or foul play.

If misrepresentations were made, the insurance company can cancel the policy altogether or choose to modify it. One way in which the company may modify the policy is by determining what the premium should have been had the policyholder provided full and truthful information and reducing the benefit by that amount. Importantly, the insurance company can cancel coverage regardless of whether the misrepresentation had anything to do with the cause of death. However, if the company finds that there were no misrepresentations or other issues, the claim must be paid, even though the policyholder died during the contestability period.

Denial of Claims due to Material Misrepresentation

During the contestability period, insurance companies can avoid paying claims through utilizing the ability to cancel the policy. However, just because the contestability period has ended, does not mean that the benefit will automatically be paid upon the policyholder’s death. One of, if not the most common, reason for denial of claims is due to a policyholder making a material misrepresentation during some part of the application process that is subsequently discovered, even after the contestability period has ended.

A material misrepresentation is a statement that, if not made, would have led to the insurer to refuse to issue the policy, at least under the terms and conditions it was issued with. The most common material misrepresentation (or omission of a material fact) that leads to a denial of claims is related to the state of health or medical history of the policyholder. However, other material misrepresentations that can cause denial of a claim include, but are not limited to:

  •                  Occupation
  •                  Income
  •                  Age
  •                  Cigarette/tobacco use
  •                  Alcohol use

If you would like more information about safeguarding against issues that may arise during life insurance claims, discuss your case with an insurance consultant lawyer.