When can an insurance company cancel a life insurance policy?

When taking out a life insurance policy, the policyholder aims to provide an extra layer of financial security and peace of mind for his or her loved ones. However, since insurers are incentivized to minimize risk, they will frequently look for reasons to cancel customers’ policies. This can jeopardize the policyholder’s supposed financial security and force him or her to evaluate other alternatives. Misrepresentations during the contestability period, nonpayment of premiums, and termination of employment are three of the most common reasons for which insurance companies may decide to cancel your policy.

The Contestability Period

The contestability period is defined as the amount of time during which an insurance company can review and fact-check information on a life insurance application. It is two years from the effective date of the policy in most states, although some (e.g. Missouri) limit it to one year. The contestability period is usually used as a means for denying claims after the insured’s death (see our blog post), but it can also be used in order to investigate and cancel existing high-risk policies.

If the policyholder left out any information on his or her policy application, such as a previous illness, medical condition, or hospital visit, the insurer has the right to investigate statements on the application and cancel coverage if something was left off. Unless there is reason to believe the application was fraudulent, the insurer has little motivation to do this while the policyholder is still alive and likely to live past the two-year contestability period.

Termination of Coverage/Lapse

The most common situation in which an existing life insurance policy may be cancelled is through nonpayment of premiums, i.e. when you don’t make one or more of your monthly payments (see our blog post for a more detailed explanation). Your coverage is unlikely to terminate if you send payment a few days late, as the vast majority of life insurance policies allow for a “grace period” of at least fifteen days. So long as the insurance company receives payment within the grace period, coverage will remain in place.

However, if the grace period expires, your coverage will lapse; in other words, your policy will be cancelled. In such a situation, you have to contact your life insurance company and meet specific conditions before reinstating your coverage. This often involves retroactively making up all missed premium payments.

Termination of Employment

Many people get their life insurance via so-called “group life insurance plans” through their employer. When you are no longer considered an active employee, your coverage will terminate along with your employment. This is often the case with workers who go on disability and are thus no longer considered “active.” Their coverage may terminate even though they are still technically employed.

In these situations, it may be prudent to request that your insurance provider convert your group policy to a privately owned, individual life insurance policy. This often requires paying high premiums and meeting certain provisions as determined by the company.

If your policy has been momentarily cancelled, you can always reinstate it or buy a new one. When the policyholder passes away before reinstating coverage, however, legal recourse may be the only option. If your loved one’s coverage was wrongfully terminated prior to his or her death, it’s best to contact an experienced life insurance lawyer to evaluate your case.