What Is An Incontestability Clause?

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    incontestability clause

    I hate jargon.  It’s where mediocrity goes to feel important.

    “If you can’t explain it to a six-year-old, you don’t understand it yourself.”  

    Amen to that.

    Which brings us to the “incontestability clause” — a long and intimidating name for a simple concept within a life insurance contract.

    I’ll give you a slightly longer answer, but when you’re done reading it, I think you’ll agree that the above pretty much sums it up.

    What Is An Incontestability Clause?

    The above is a quote from an incontestability clause of an actual life insurance policy.

    Here’s what it’s saying.  If you purchase a policy and make all of your monthly premium payments for two years, then after that point, an insurance company cannot try to deny paying your death benefit by pointing to errors they found in your application.

    Even if the company would never have approved you if they had the correct facts, they still have to abide by the policy and pay your beneficiary your death benefit.

    Do Incontestability Clauses Encourage Fraud?

    You’re may be thinking two things:

    1.  This sounds far too “pro-consumer”… 

    Especially for financial services.  Usually the deck is stacked in the company’s favor, and the consumer gets the short end of the stick.

    2.  Doesn’t the incontestability clause make it easier for people to commit fraud?

    People could lie on their life insurance application, cross their fingers that their insurance company doesn’t find out for two years, and then voila!  They’ve essentially stolen valuable life insurance coverage.

    The short answer is, yes, it does make this type of fraud easier.

    But remember that the incontestability clause doesn’t stop criminal prosecution.

    If a person flagrantly lies on their application, that’s insurance fraud and they could go to jail for a long time.  Whether the life insurance company discover the fraud 10 minutes after you submit the fraudulent application or ten years after.  You can still be prosecuted for a serious felony and put behind bars for a long time.

    Why The Incontestability Clause Exists

    If you were thinking the above, your instincts are right.  The incontestability clause is an anomaly in terms of how permissive it is to fraud.

    So why does a provision like this exist?  A quick story should make it easy to empathize with.

    A Story To Explain This Point

    Let’s say that Mary purchases a $500,000 life insurance policy from OneLife Insurance Company.  She makes her premium payments every month for four years, but sadly, one day while watching C-SPAN, the insured dies of boredom.

    After her husband, John, files the claim, the life insurance company spots an error on Mary’s application.  She claimed to be a non-smoker, but they learned from Facebook that Mary smoked a cigarette in college.

    They bring this to a court, looking to “contest” John’s claim (avoid paying benefits).

    They point out that Mary provided false or incomplete information on her life insurance application.  They would have denied Mary had they known this, so they should not have to pay John the policy’s death benefits.

    Now John is forced into a legal battle with a deep-pocketed company while he’s grieving a heartbreaking loss.  Not to mention that he’s struggling financially already without Mary’s income and upcoming college tuition payments, car payments, and more.  

    …That’s a tough spot to be in as a consumer, right?  The insurance company has time, money, and leverage.  You have none of these, plus heartbreak.

    Conclusion & Takeaways

    There’s no doubt that the incontestability clause is an oddball.

    Usually, our contract laws lay out general principles and then let the court system decide on the grey areas of each specific case.

    Rarely do you see a law that puts a line in the sand as strongly as the incontestability clause, favoring one side by default and not even allowing the other side to make their case in court.

    It ultimately comes down to what is the lesser of the two evils.  Is it better to risk allowing some fraud to go unpunished or to risk some corporations unfairly taking advantage of consumers who are at their most vulnerable?

    The longevity of the incontestability clause (161 years old in 2021) shows that society believes we can’t risk the latter, and I would say that is absolutely the right decision.

    Rikin Shah

    Rikin Shah

    Rikin is the Founder & Head of Content at GetSure. He is a licensed life, accident & health insurance agent, with over 10 years of experience in the financial services industry. He holds a B.S. in Applied Mathematics from Columbia University and an MBA from The Stanford Graduate School of Business.

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