What is a Contestable Clause?
A contestable clause is the portion of a life insurance policy that specifies in which cases the life insurance company may contest a claim made against the policy. The contestable clause, also called a contestability clause, is usually a set amount of time, e.g., for the first two years of the policy.
How contestation works
If the insured dies while the contestable clause is in effect, the insurance company has the right to investigate the claim made for their death benefit. Specifically, that means that they could dig deeper, comparing the information the insured provided on their life insurance application with the details surrounding their death.
When a policy has an effective contestable clause, the beneficiaries usually need to wait longer to receive the death benefit payout. It can take several months for the insurer to look into the details surrounding the insured’s life and death, which means waiting for them to make a decision about whether to uphold or void the policy.
The insurer needs to find meaningful misrepresentations to nullify coverage. If the insured reported that they didn’t smoke on their application, for example, but the insurer finds that they told their doctor they smoked a pack a week, they could void the policy. At that point, the now-deceased insured’s beneficiaries will not receive any payout from the insurance company.
It’s important to distinguish that the insured passing away while the contestability clause is in effect does not directly void the insurance policy. Instead, the coverage can only be voided if the insurer finds that the insured misrepresented key details during the underwriting process.
The terms of most contestable clauses
With most life insurance policies, the contestable clause is in play for the beginning of the policy. It might apply for the first two years of coverage, for example.
After that time period has ended, many policies convert the contestable clause into an incontestability clause, which says the insurance company cannot investigate and contest the beneficiary’s claim.
While some insurance applicants intentionally mislead insurance companies during the underwriting process, hoping to outlive the contestable clause in an attempt to get cheaper life insurance, it could be a costly mistake. If you pass away within the contestable clause window and your insurance company learns the truth (something they’re very adept at doing), your beneficiaries will be left with nothing. What’s more, all the premiums you paid up until the time of your death will essentially have been money in the trash.