Life insurance seems pretty straightforward, right? You pay premiums during the length of the term, and if you die during that time period, the insurer pays your beneficiaries.
And most of the time, that’s exactly how it works. The only caveat is during what’s called the contestability period; that usually only takes place at the beginning of the policy, but there’s a certain scenario when it can kick in a second time (or third, etc.) during the life of the policy. It's a rare case, and even though most people looking for life insurance - and even those who already own it - don't know about, it’s something you’ll want to avoid happening.
What is the contestability period?
The contestability period is a two-year window after your policy goes into force when an insurer gets to look back at a policyholder's application and determine whether any type of fraud was committed. This safety period ensures that customers pay the proper amount to get covered, and insurers are able to work out the complicated financials of life insurance. Even if it’s not completely related – you die in a car accident but the insurer finds out you were a smoker when you said you weren’t – it could mean big things for your coverage.
If you’re still alive during the contestability period and the insurer finds out about the misrepresentation, it could mean adjusted premiums (so you’ll be paying what you should) or, in the worst case, a cancelled policy. If you die during it, the death benefit could be lowered or not paid out at all.
The contestability period doesn’t sound great – at least if you’re a policyholder. Who do these life insurers think they are, not paying out a death benefit?
It’s actually important for everyone, though. Life insurers set rates by classifying customers based on how risky they are. If you’re a 70-year-old chain-smoking gator wrestler with high cholesterol, there’s a greater chance you’re going to die during the term of your policy than a perfectly healthy 28-year-old who looks both ways before she crosses the street.
Your risk classification determines your premiums. It may be more expensive to insure some people, but it in the end it allows them to be insured – even if it comes at a cost.
The thing is, as you probably already know considering you live on Earth, people don’t like paying more for things than they have to. If someone says during their application process that they never skydive when, in fact, it’s their life’s passion, they’ll pay less. But they’re riskier, so they’re not paying their fair share.
You might think you’re in the clear after those first two years, but the contestability period can can sneak up on you again later on during your term.
Resetting the contestability period
The contestability period technically only kicks in when your policy coverage begins, but that doesn’t mean it’s when you first apply.
Confused? Let’s dig into it.
Your term life insurance policy stays in effect as long as you pay your premiums, but maybe you forget to pay them. It happens to the best of us, and insurers know that. That’s why there’s often a 30 or 31 day grace period for you to make a missed payment. Any later than that and your policy will have lapsed. You can often talk to your insurer, fill out an application of reinstatement, pay up, and get covered again.
However, you’ll find the reapplication has a lot of the same steps as the original application. Take a look at this reinstatement application. A lot of it looks familiar if you’ve already applied: health status, health history, financial information, and so on. You may have to take your paramedical exam again, too.
This also means that the contestability period resets.
That two year window that kicked in after you initially applied goes back into effect when you reinstate. So while you thought you were in the clear (assuming you misrepresented something on your application), you’d better hope that you don’t die during the two years after you reinstate your policy. (There are other reasons to hope not to die, of course. But if yours are financially-motivated, keep this in mind.)
While you can’t avoid the contestability period when you first apply for life insurance, you can avoid it later on by simply paying your premiums on time. Luckily, though, letting a policy lapse is the only way that the contestability period can come back into force, so take care of things with your premium payment and you’ll be in the clear.