Is the Insurance Company Withholding Benefits from You?
The incontestability clause in life insurance policies is one of the strongest protections for a policyholder or beneficiary. While many other legal rules for insurance seem to favor the insurance companies, this rule is soundly on the side of the consumer.
Remember that life insurance is a form of contract between two parties: the insurance company, and the policyholder. Now, a conventional rule for contracts says that, if one party has given false or incomplete information that the other party relied on when making the contract, then the second party has the right to void, or cancel, the agreement later on. That party can claim that the inaccurate information meant there was no meeting of minds to make a valid contract in the first place.
The incontestability clause forbids insurance companies from doing exactly that.
About a century ago, state governments began to require life insurance companies operating within the borders of their state to add these clauses to every policy they issue. Today, almost all life insurance policies will contain this provision in some form. Typically, the clause states that, after two years—or even only one year, in some states—the insurance company cannot void or cancel the policy as long as premiums continue to be paid.
State laws often permit three exceptions to the incontestability clause:
- Most states provide that if the insured person misstated age or gender when applying for life insurance, the insurance company may not void the policy but may adjust the death benefits to reflect the policyholder’s true age.
- Some states allow insurance companies to include a provision stating that the contestability period must be completed within the lifetime of the insured. This allows a life insurance company to refuse to pay benefits if a policyholder was so unwell when she applied for coverage that she died within the one- or two-year contestability period.
- Some states also allow the insurance company to void the policy if deliberate life insurance fraud can be proven.
How the incontestability clause helps the consumer
It is, unfortunately, quite easy to make a minor error when applying for life insurance. An applicant often will be required to provide a complete medical history before the policy is approved. If he forgets to list a hospital stay, an illness, an occupational hazard, or even an allergy on the application form, the insurance company has potential grounds to deny paying life insurance benefits later on.
In fact, that was often the standard practice for life insurance companies in the late 1800s. Many insurance firms used deceptive practices to collect premiums and deny benefits on one technicality or another. In fact, reputable insurance companies originally introduced the incontestability clause to build up consumer trust. By promising to pay full benefits after the policy has been in place for two years (even if there were some errors in the original application), these insurance companies tried to clean up the industry’s image. This proved so successful that, early in the 20th century, state governments began to pass laws requiring insurance companies to include the incontestability clause.
Today, when someone purchases life insurance, the clock immediately begins to run on the contestability period. If, after two years, the insurance company has not found an error in the original application, then the benefits are assured. Even within that period, it’s not easy for the company to rescind a life insurance policy. Under most state laws, the insurance company will have to file suit in court to have the contract nullified officially; sending a notice to the policyholder is not enough.
What to do if your policy is challenged
Of course, legal action to rescind your policy allows you a chance to challenge that claim. Similarly, if you are named as a beneficiary for someone’s life insurance but the company is withholding your benefits, the incontestability clause may force the company to make a settlement.
The specific facts in your case are crucial to determining the outcome, and that’s why you need legal advice today. The Life Insurance Lawyers at Life Insurance Law work with clients across the United States to recover delayed and denied life insurance claims.
We can negotiate with the life insurance company to obtain a settlement or take your case to the courtroom. Call us today at (215) 531-7961 for a free and confidential consultation. You owe us nothing unless we get you a recovery.