What is 'Incontestability Clause'

An incontestability clause is a clause in most life insurance policies that prevents the provider from voiding coverage due to a misstatement by the insured after a specific amount of time has passed. A typical incontestability clause specifies that a contract will not be voidable after two or three years due to a misstatement.

BREAKING DOWN 'Incontestability Clause'

Incontestability clauses help protect insured people from firms who may try to avoid paying benefits in the event of a claim. While this provision benefits the insured, it cannot protect against outright fraud. Lying to an insurance company with an intention to deceive can result in the cancellation of coverage or even criminal charges.

The incontestability clause in life insurance policies is one of the strongest protections for a policyholder or beneficiary. While many other legal rules for insurance favor the insurance companies, this rule is notably and strongly on the side of the consumer.

While conventional rules for contracts stipulate that if false or incomplete information was provided by one party when making the contract, then the second party has the right to void, or cancel, the agreement. The incontestability clause forbids insurance companies from doing precisely this.

Three common exceptions to the incontestability clause

  • In most states, if the insured person misstates age or gender when applying for life insurance, the insurance company may not void the policy, but it can adjust death benefits to reflect the policyholder’s true age.
  • Some states allow insurance companies to include a provision, stating that a one- or two-year contestability period must be completed within the lifetime of the insured. In this scenario, a life insurance company can refuse to pay benefits if a policyholder was so unwell when they applied for coverage that they died before the contestability period was over.
  • Some states also allow the insurance company to void a policy if deliberate fraud is proven.

How incontestability clauses help consumers

Errors are easy to make when applying for life insurance. An insurance company will often require a complete medical history before the policy is approved. If an applicant forgets a single detail, the insurance company has potential grounds to deny paying life insurance benefits later on.

Reputable insurance companies originally introduced the incontestability clause in the late 1800s to build consumer trust. By promising to pay full benefits after the policy has been in place for two years (even if there were some errors in the original application), these insurance companies tried to clean up the industry’s image. The effort was successful, and early in the 20th century, state governments began to pass laws requiring the incontestability clause.

Today, the clock immediately begins to run on the contestability period as soon as a life insurance policy is purchased. If, after two years, the insurance company hasn't found an error in the original application, benefits are assured. Even within that period, it’s not easy for the company to rescind a policy. Under most state laws, the insurance company must file suit in court to nullify a contract. Sending a notice to the policyholder is not enough.

RELATED TERMS
  1. Valuation Clause

    A provision in certain insurance policies that specifies the ...
  2. Cancellation Provision Clause

    It is a provision in an insurance policy that permits an insurer ...
  3. Waiver Of Inventory Clause

    A clause in an insurance policy that says that the insurance ...
  4. Agreed Amount Clause

    A property insurance provision in which the insurer agrees to ...
  5. Reinstatement Clause

    An insurance policy clause that states when coverage terms are ...
  6. Financial Responsibility Clause

    A provision within an automobile insurance policy which indicates ...
Related Articles
  1. Insurance

    4 Things That Keep You From Getting Life Insurance

    We look at four common reasons people give for not applying for life insurance, and see if they're legitimate.
  2. Insurance

    Term Life Insurance: Everything You Need to Know

    Term life insurance is an affordable way to financially protect your loved ones after your death. Here's what you need to know before purchasing a policy.
  3. Insurance

    Life Insurance: How Long Does It Take To Get Paid?

    How to file for a life insurance payout – and how long it takes to receive it. Plus, new ways to plan for payments that provide an income stream.
  4. Insurance

    Exploring Advanced Insurance Contract Fundamentals

    Understanding your contract can help you protect our family's financial security.
  5. Insurance

    Do You Need Casualty Insurance?

    Find out how different types of coverages can protect you and which policy is right for you.
  6. Insurance

    How Much Life Insurance Should You Carry?

    Before purchasing life insurance it important to decide if you really need it, what type of policy is best, and how much coverage you should get.
  7. Financial Advisor

    Advising FAs: Explaining Life Insurance to a Client

    Life insurance was initially designed to protect the income of families, particularly young families in the wealth accumulation phase, in the event of the head of household's death.
  8. Financial Advisor

    Who Should Buy a Guaranteed Issue Life Insurance Policy?

    Guaranteed issue life insurance policies have added costs and reduced benefits that make them suitable for only a limited pool of buyers.
  9. Insurance

    How to Pick the Right Life Insurance Plan

    Finding the right life insurance policy - if you need one at all - can be more challenging than it seems. Use this guide to find the right one for you.
  10. Managing Wealth

    6 Insurance Policies That Protect the Wealthy

    Here are six types of insurance that the wealthy use to protect their assets.
RELATED FAQS
  1. What is an alienation clause?

    Whether used in reference to insurance policies, mortgages or commercial loans, an alienation clause stipulates that should ... Read Answer >>
  2. Can your insurance company cancel your policy without notice?

    Learn about your rights as an insured when it comes to your insurance policy being canceled, including how to access your ... Read Answer >>
Hot Definitions
  1. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  2. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
  3. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  4. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. ...
Trading Center