by Guest » Sat Feb 23, 2013 09:32 am
How exactly does the contestability period function for life policies? What if the misrepresentation goes undetected during the period? Does the insurer deny coverage if there are missed payments or policy lapse during the period?
Posted: Sat Feb 23, 2013 03:15 pm Post Subject:
What if the misrepresentation goes undetected during the period?
That's precisely the purpose of "incontestability". Once the policy becomes incontestable, nothing in the application matters -- including fraud in most states. There are two primary exceptions which escape incontestability forever: (a) impersonation of the insured (John represents himself to be James) and (b) no insurable interest between the insured and the policyowner at the time the policy is issued -- even if discovered 20 years later (all of the premiums paid would have to be refunded in either situation, because the policy is known as "void ab initio" -- void prior to its beginning -- an "absolute" condition under contract law).Does the insurer deny coverage if there are missed payments or policy lapse during the period?
There is a difference between "missed payments" and "policy lapse". If the policy has cash value, missing one or more payments may not be a problem, as long as there is sufficient cash value available to pay the cost of insurance each month (through policy loans). But when the money runs out (or, in the case of term life insurance, where there is no cash value), when the next payment comes due but has not been paid, it triggers a 30 (or perhaps 60) day "grace period" as stated in the contract, which is the length of time that there will still be coverage even though no money has been paid (or borrowed to make the payment), and during which the payment(s) may be made to keep the policy in force.If a death occurs during the grace period, the unpaid premium plus interest, if any, is deducted from the death benefit (as would be any loaned premium payments even if the policy were not in the grace period) and the remainder is paid to the beneficiary.
Why is "policy lapse" different than this? Because when a policy has lapsed, there is NO INSURANCE in force, and dying one day too late is the same as dying one year, ten years, one thousand years after the grace period has ended.
Each state also has a "standard nonforfeiture law" in place that governs the one possible exception to this, which could occur if a cash value policy does not have an "automatic premium loan" provision. Depending on the state's law, that provision would pay the remaining cash value to the beneficiary as the death benefit or the cash value would be converted to "extended term insurance" (the usual "default" provision) when the policy would otherwise lapse due to nonpayment of the premium. Extended term insurance provides the same face amount of insurance for a limited period of time, expressed as a number of years and/or days. Then, dying one day too late will have the same result as the previous statement above.
There is a third nonforfeiture provision available to the policyowner called "reduced paid-up insurance". If elected, the cash value is converted into a smaller amount of permanent insurance that can never be lost. During the "contestable" period (usually the first two years of the policy), there is normally no cash value, so this discussion of "nonforfeiture values" applies mostly to policies which have been in force for a longer period of time.
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