When Can an Insurance Company Contest a Life Insurance Contract?

Life insurance provides financial protection to beneficiaries upon an insured individual’s death. It is a contract where, in exchange for regular premium payments, an insurer promises to pay a death benefit to chosen beneficiaries when the insured passes away. This offers a financial safety net, helping families cover expenses and replace lost income. While these contracts offer security, an insurance company may review or challenge their validity under specific, limited circumstances governed by established principles.

Understanding the Contestability Period

A life insurance policy includes a contestability period, typically two years from the policy’s issue date. This timeframe allows the insurer to investigate the accuracy of information provided in the application. Its purpose is to allow the insurer to discover material misrepresentations or fraud made by the applicant during underwriting.

During this two-year period, if a claim is filed, the insurer can review the application. They will examine statements about the insured’s health, lifestyle, and other factors. If discrepancies are found that would have affected the insurer’s decision to issue the policy or its terms, the policy may be contested.

Once the contestability period expires, the insurer’s ability to challenge the policy’s validity is limited. After two years, a policy is generally “incontestable,” meaning the insurer cannot deny a claim based on misrepresentations. However, this incontestability clause usually includes an exception for intentional fraud, which can still be grounds for contestation at any time.

Reasons an Insurer May Contest

An insurance company may contest a life insurance policy primarily based on material misrepresentation or fraud in the application. Material misrepresentation occurs when an applicant provides inaccurate information that, if known by the insurer, would have led to a different underwriting decision. This could mean denying coverage, offering different terms, or charging a higher premium. Examples include failing to disclose a significant health condition, smoking status, or participation in dangerous hobbies. This type of misrepresentation does not require intent to deceive, only that the information was incorrect and relevant to the insurer’s risk assessment.

Fraud, in contrast, involves an intentional act of deception by the applicant. This means the applicant knowingly provided false information with the intent to mislead the insurer. Because fraud involves deliberate deceit, an insurer can generally contest a policy due to fraud at any time, even after the standard contestability period has passed. Intentional deception distinguishes fraud from unintentional misrepresentation.

Another ground for contestation is a lack of insurable interest at the time the policy was issued. Insurable interest means the policy owner would suffer a financial loss if the insured person were to die, which is a fundamental requirement for a valid life insurance contract.

Outcomes When a Policy is Contested

If an insurance company successfully contests a life insurance policy, the policy is typically rescinded. Rescission means the contract is treated as if it never existed, effectively canceling it retroactively. This action generally leads to the denial of the death benefit claim, as the policy is deemed invalid.

In most instances of policy rescission, the insurer must return the premiums paid by the policyholder or their estate. This prevents the insurer from being unjustly enriched by retaining money for an invalid contract. This reimbursement typically includes only the premiums paid and usually does not include interest.

If an agreement cannot be reached between the insurer and beneficiaries, the matter may proceed to legal action. A court would then decide on the validity of the insurer’s contestation based on evidence. A successful contestation can also impact the individual’s ability to secure future life insurance coverage. Information on contested policies may be shared through industry databases, potentially making new coverage more challenging or expensive to obtain.