The purpose of a life insurance policy is to provide coverage in the event of a loved one’s unexpected death. The insurance company is contractually obligated to pay the specified death benefit regardless of when the loved one dies, whether it is four months or forty years after the policy takes effect. However, if the insured dies within a year or two of obtaining or increasing their insurance policy, the company will look for reasons to avoid paying the claim. This is likely to happen if information on the application was inaccurate or if the insured committed suicide.
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. If the insured dies during the contestability period, the company will do a full investigation of the individual’s medical records as well as all of the other information requested on the application. This means that if any medical information was left off the policy application, the insurance company will have grounds for denying a claim or reducing the death benefit. They are only obligated to pay out if all the information made on the policy application was completely accurate. If there were any misrepresentations or falsities, they will invalidate the policy and refund premiums instead of paying the full death benefit.
Generally, claims in which the insured passed away during the contestability period have a significantly higher chance of being denied than they would after the period expires. Although the length of the contestability period varies (e.g. Missouri is one year), it is two years in most states. Although it may be frustrating to policy owners and beneficiaries, the contestability period makes sense from a legal perspective. Say you were diagnosed with a terminal illness and decide to take out a valuable life insurance policy so that your relatives can benefit upon your inevitable death a few months later; on the application, you fail to mention your diagnosis such that the insurance company has no idea of your actual condition. If insurance companies were not allowed to “contest” policies such as these, they could consistently be taken advantage of by those with terminal conditions. However, companies will also use this to their advantage; if the application asked the applicant to state any diagnosis of an anxiety disorder in his or her lifetime and the insured failed to mention a childhood diagnosis of OCD, the beneficiary’s claim can still be contested even if the misrepresentation has little to do with the insured’s cause of death.
The Suicide Clause
It may seem morbid, but most life insurance policies contain a provision, or “suicide clause,” in which claims can be denied in the event of the policyholder’s suicide. This clause generally applies during the aforementioned “contestability period,” so if the policyholder commits suicide more than two years after buying the policy, beneficiaries are still entitled to the death benefit. This is meant to deter people from buying policies with the intention of committing suicide shortly afterwards, thereby leaving large sums of life insurance benefits for their family members. Additionally, it is important to note that AD&D policies never cover suicide, which by definition cannot be considered an “accident.”
If a policyholder dies shortly after buying life insurance, the insurance company has more freedom to contest/deny the beneficiary’s claim. Consequently, it is all the more important to contact an experienced life insurance lawyer if your claim has been unjustly delayed or denied.