Incontestability Clause - Explained
What is an Incontestability Clause?
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Table of ContentsWhat is an Incontestability Clause?How Does an Incontestability Clause Work?How Incontestability Clauses Help ConsumersAcademic Research
Back To: INSURANCE & RISK MANAGEMENT
What is an Incontestability Clause?
In life insurance policies, an incontestability clause protects the policyholder and prevents the policy provider from tampering with any part of the insurance coverage based on a mistranslation or misstatements by the insured (policy holder) after a period of time. An incontestability clause makes it impossible for a policy provider to void any statement of the life insurance policy after and amount of time has passed. This clause is often seen as the strongest protection for policyholders. The availability of this clause in a life insurance policy means that the insurer cannot dispute any term of the policy based on the claim that the insured made a misstatement.
How Does an Incontestability Clause Work?
On the basis of an incionstestabikity clause, a policy is incontestable even after a period of time has passed. In mosts cases, insurers in abid to avoid paying benefits to an insured make claims leading to them voiding the policy due to a concealment or misstatement by the insured. Under the incontestability, such claims are inadmissible, and a policy cannot be voided even after specific time has passed. The clause is a strong protection for the insured but the downside is that it does not protect the insured from fraud penetrated by the insured. For example, if an insured lies to conceal facts in an insurance policy, the coverage can be withdrawn and all benefits canceled. However, in cases on misstatements by the insured, the incontestability clause prohibits the insurer from voiding the policy. There are certain exceptions in the incontestability clause, they include the following;
- Misstatement of age and gender by the insured when applying for life insurance policy is not covered by the incontestability clause. Most states permit that the insurer can adjust the benefits of the policy when such an incident occurs.
- Another exception to the incontestability clause is when there is a rule that the contestability period must be complete when the insured is still alive but the insured passes on before the contestability period which is often one or two years.
- An intentional fraud by the insured makes the incontestability clause ineffective. The insurer can void such policy.
How Incontestability Clauses Help Consumers
The incontestability clauses was introduced in the late 1800s to help policyholders and hep build trust with the insurance company. In many cases, the incontestability clause protect policyholders in a life insurance policy, from being deprived of their benefits based on the claim that there was a misstatement by them when applying for the policy. There are however some exceptions to the incontestability clause, the major ones are listed above. When applying for life insurance, many consumers make some mistakes, before the incontestability clause was introduced, an insurance company can void the policy when mistakes or errors are noticed. With the incontestability clause, if the insurer did not detect the error in the original application, the policy cannot be voided on the grounds that the insured made some mistakes while applying for life insurance.
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