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Incontestability Period

Course: Insurance Planning
Lesson 2: Fundamentals of Insurance

Student Question:

For the question below, the answer was #3.

Susan died yesterday, exactly ten years after a life insurance policy on her life was issued to her. The policy was in effect at her death. She understated her age on the initial policy application and the underwriter discovered that misrepresentation when investigating the death benefit claim. Which of the following is a likely consequence to Susan’s beneficiary? 

  1.  No death benefit will be paid and the premiums paid will be retained by the insurer. 
  2.  No death benefit will be paid but the premiums paid will be refunded to the beneficiary by the insurer. 
  3.  A death benefit will be paid at a reduced amount from the face amount of the policy. 
  4.  The face amount of the policy’s death benefit must be paid because more than two years have elapsed since the policy was issued.

If the contestability period is generally a twoyear period and ten years passed, why was only a reduced amount paid?  Is it because there was no incontestability period stated or because her age wasn’t correct?

Michael


Instructor Response:

Hey Michael-

Great question!  So, within the contestability period, if the insurer finds the insured lied or concealed any information, they can cancel the policy and return all premiums paid.  After that incontestability period, they can no longer flat out deny claims.  However, they can reduce the death benefit to an amount that would have matched what should have been paid. 

For example, if I said I was 32 years old but was actually 42, if the insurer finds that out when I die, they would reduce the death benefit paid to my beneficiary to an amount that would match what would have been paid had I been originally truthful about my age.  But they cannot deny the entire death benefit. Now if they found out in the first 2 years, they could cancel my policy and return my premium payments.

Does that help to clarify?

Dan