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What is a contestability period?

Buying life insurance is one of those tasks a person may not like to think about but knows it is important to do. It's not always easy to ponder the end of your life, but the positive side is that you are considering the good of your family. However, your insurance agent may have mentioned that, for the next couple of years, you are in a "contestability period," and you may not be sure what that means.

Insurance companies are businesses, and, like any business, they want to make more money than they pay out. In order to protect themselves from people who try to commit fraud by being less than truthful on their applications, insurance companies institute contestability periods. The problems arise when you are the loser of the contest.

Honesty yields the best policy

For a period of time after you take out a life insurance policy - usually two years - you are in a kind of probationary period. If you should die within that time, the law allows the company to withhold the benefits from your family while they delve more deeply into your application, your general health and your cause of death. They are looking for evidence that you committed fraud on your application. Some people may do this to avoid paying higher premiums.

If you did not disclose important information, an investigation may uncover the truth. For example, withholding that you are a smoker or that doctors have diagnosed you with a medical condition may result in the insurance company disputing your beneficiary's claim. After discovering a material misrepresentation, the insurance company will typically take one of these steps:

  1. Pay your beneficiary but deduct any additional charges that you would have incurred if you had made a full disclosure
  2. Deny your beneficiary's claim and refund your premiums

A claim denial should happen only if the investigation determines that they would have denied your application had you made a full disclosure in the first place. The insurance industry claims that it disputes less than 1 percent of life insurance claims each year.

Good faith, bad faith

If you have been forthcoming on your life insurance application, there should be no reason for the insurance company to deny your beneficiary's claim. However, too often, insurance companies do not act in good faith. They may delay payment while your family struggles to make ends meet, mislead your beneficiary about the terms of the policy or advise your beneficiary not to hire a lawyer.

Hiring a lawyer may be in your family's best interests. An attorney will know how to expose an insurance company's bad faith actions and hold them accountable. Having someone to stand up for your loved ones against the intimidating tactics of unscrupulous insurance companies may ensure they will be well provided for, as you would have intended.

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