Life insurance is a contract between the insured and the insurance company. For a contract to be legally enforceable, both parties to the contract have to agree to the same things. For example, if an insurance company believes it is providing insurance for a non-smoker but is really insuring someone who smokes a pack a day, the two parties have not agreed to the same terms.
State law governs contracts and insurance policies. Most states believe that while people should not be able to lie and commit fraud to get insurance, insurance companies also have a responsibility to properly screen applicants and evaluate the risks of insuring an individual before issuing an insurance policy. That is why many states have something called a contestability period for life insurance.
What a Contestability Period Means For You
If an insurance policy has a contestability period and an insured dies within that period, the insurance company has a right to contest the claim. The insurer will review the application for errors and misstatements and may request medical records and other evidence to support or contradict the information on the application.
A contestability period is generally two years, although some states have shorter periods. After that period ends, the insurance policy is generally considered incontestable, meaning that the insurance company cannot deny coverage because of something that happened during the application process.
Reasons for Denial After the Contestability Period
There are a few reasons a beneficiary might receive a letter saying, “life insurance payout denied” after the two-year contestability period. The main reason insurance payouts are denied is because someone stopped paying the premiums and the policy lapsed. There is usually a window of time after a policy lapses in which the policy can be reinstated. However, when the policy is reinstated, a new contestability period may begin.
Life insurance claims may be denied after the contestability period if fraud was committed to obtain the policy. Some states include fraud under the contestability clause while other states allow insurance companies to include a specific fraud exception in the policy. Fraud exceptions say that if the policy was issued based on fraud by the applicant, the insurance company can refuse to pay as long as the fraud exception is in force. The company will have to prove that fraud was committed in order to avoid payment. State law also defines what information or omission can be considered fraud.
State law may allow exceptions to life insurance payouts based on the cause of death. Suicide and inherently dangerous sports are common examples of causes of death that insurance companies can exclude. Many policies contain a time period for the exclusions. In most instances, if an insured dies from an otherwise excludable cause after that clause has expired, the insurance company must pay the claim.
If you are struggling with a “life insurance payout denied” notice, and it has been more than two years since your policy was issued, you may have received the notice in error. It is also possible that the insurance company is acting in bad faith. Attorney Chad G. Boonswang has helped many people through the process of getting insurance companies to pay on life insurance claims the company initially denied. Contact Boonswang Law today for a free consultation.