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What is an incontestability clause?

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Protecting and providing safety for loved ones fundamentally describes the purpose of insurance. The decision to take out a policy is based on taking action in the event of unforeseen circumstances and to mitigate damage caused by a loss of health, or a loss of life and a loss of income. 

But the purchase of a life or health insurance policy can be a complex matter. These applications consist of a number of questions that require honest, detailed answers. Insurance companies set rates and coverage levels based on the information provided in the application. 

While insurance applications provide baseline information, errors, mistakes and omissions can lead to sticky outcomes when it comes time to pay a claim. To address these and other issues, incontestability clauses now appear as a standard part of insurance contracts. 

What is an incontestability clause?

Incontestability clauses in life and health insurance policies provide assurance to policyholders that a policy remains valid and pays beneficiaries without regard to any initial application misstatements at the time when the insurance was purchased. In most cases, incontestability clauses prevent insurers from voiding the insurance contract after a period of two to three years after its activation. 

Part of most all life and health insurance policies, these clauses act as one of the strongest consumer protections for policyholders and their beneficiaries. Although plenty of legal protections exist for insurers, incontestability clauses protect against unwarranted claim denials and originated as a means of providing accountability between insurers and the insured. 

Although the accountability aspect still holds true today, protections against misstatements means something very different than protections against fraud. In other words, blatant fraud is still an “out” for insurers. 

How does an incontestability clause work?

An incontestability clause works as a kind of consumer insurance policy within the life insurance policy, providing a guarantee that beneficiaries receive payout on a death claim, even if an error or mistake was present on the initial application. 

Most incontestability clauses include a provision stating that the two or three year period that covers the contestability period must be completed within the lifetime of the policyholder. If you are unsure if your life insurance policy includes an incontestability clause, reach out to an agent or your provider to verify. 

Exceptions to an incontestability clause

Of course, these clauses come with their own sets of rules intended to distinguish between an honest mistake or omission on an insurance application and outright deception or fraud. These exceptions protect the insurance company. 

Besides fraud as an exception to an incontestability clause, other caveats include:

  • Time limit: the incontestability clause goes into effect during the lifetime of the policy holder. With this provision, insurers are protected from paying a death benefit for policyholders so sick that they die before the incontestability clause takes effect. 
  • Disability development: policyholders who develop disabilities during the contestability period may void the policy. This caveat stops the incontestability clause clock from ticking, allowing insurers to challenge claims during the illness and beyond. 
  • Age/gender: Surprisingly, misstating age or gender on a life or health policy application doesn’t necessarily void a policy. In most states, insurers adjust the benefit payout to reflect the policyholder’s true age and sex. 

How the incontestability clause protects consumers

Since its introduction into policy coverage in 1864, the incontestability clause “has achieved widespread acceptability in modern-day health and life insurance policies,” according to the Chicago-Kent Law Review. Introduction of the clause provided credibility to insurers long-term viability and also reduced litigation around claims. 

From a consumer standpoint, life insurance acts as a financial planning tool. Prior to the introduction of incontestability clauses, the lack of reliability in terms of heir’s actually receiving a benefit translated to higher financial planning risk. 

And while the incontestability period serves to boost consumer protections around insurance products, an insurer’s ability to rescind a policy during the contestability period does include limitations. Most states require a formal court filing on the part of the insurance company, for example, in order to nullify an insurance contract. It’s insufficient to only send a notice to policyholders or beneficiaries. 

The takeaway

  • An incontestability clause acts as a kind of guarantee that insurers pay benefits after a set time period. 
  • Incontestability clauses remove the possibility of claim denial for errors or omissions in an insurance policy application, in most cases. 
  • While an incontestability clause works as a kind of consumer protection, stipulations and provisions also protect insurers from fraudulent or deceptive claims. 
  • Deliberate misstatements, misrepresentations, deceit, omissions or other untruths provided on an insurance application may lead to not only the denial of claim but also to criminal charges. 

Most life and health insurance policies today include incontestability clauses. These are designed to reduce complexities around policy coverage by offering less scrutiny around payouts after establishing a history with an insurer. With increased assurance that heirs receive intended benefits, family financial planning efforts become more effective. 

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