Litigation

Someone has made a comment on another industry blog concerning life insurance that I though would best be addressed in this forum. The writer appears confused over the significance of the contestable period on a life insurance policy. Here's what she writes:

"I have noticed lately that there are a lot of concerns about life insurance policies and the fact that you have to keep them for at least a year or whatever the term says before you can actually bank on the policy. So if you get a life insurance policy and you die in 2 weeks, then you do not get the life insurance payoff because you died too fast (no matter what the reason is). It is important to check out the life insurance company you are going to be dealing with on this aspect".

The contestable period defines a measure of time during which a life or health insurance company can protect itself from material misstatements made in an insurance application. Consider that a nominal down payment could turn into a $1 million claim in a matter of days or hours and perhaps you will understand the need for the life insurance company to have all of the information at its disposal to properly evaluate the risk.

Let us assume. for example, that you applied for a life insurance policy and lied on the application that you never smoked. If during the contestable period the insurance company discovers that you in fact smoke like a chimney, they can rescind the policy, and refund your money. If, however, they discovered this after the contestable period had expired, they could not take the policy away from you. Contestable periods are defined in the policy and are typically 1-2 years. Some policies have extended periods for fraud.

With respect to "banking on the policy", there is plenty of evidence that insurance companies pay claims during the contestable period. If you prepay your life insurance application or disability insurance application you will receive a conditional receipt. The receipt spells out the conditions for which a claim will be paid during the underwriting period. Assume someone dies in a motor vehicle accident one month after a life insurance application and insurance physical have been submitted to the insurer. Should there be a claim during this time, the insurance company will typically continue underwriting the application as if the decedent were alive, collect all the underwriting requirements to determine if the decedent would have been insurable. If so. it pays the claim.

A contestable period is an important consideration in the event you are replacing one insurance contract with another. If you have had a policy with company A for 5 years, the contestable period is over. If you go to policy B to save a few bucks but in aspiring to be the next "Leland Van Lew" you neglect to disclose your "crocodile wrestling" and "volcano luging" avocations on the app, you may have some problems.

The classic scene from Universal Pictures' Along Came Polly features a passionate promotion of risk taking "Leland Van Lew" (portrayed by Bryan Brown) for insurance by "Sanford Lyle" (portrayed by Philip Seymour Hoffman) to a panel of "insurance underwriters". What is notable is that "the insurance" was approved after FULL DISCLOSURE.