An incontestability clause in most life insurance policies 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. Show
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.
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. 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 this.
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 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.
It's a consumer protection that prevents insurance companies from ending coverage due to a misstatement by the insured after several years have passed.
Errors are easy to make when applying for life insurance. 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. 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. The incontestability clause prevents this from happening.
Misstating age or gender permits the insurance company, in most states, to adjust death benefits to reflect the policyholder’s true status. 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. In some states, an insurer can void a policy if deliberate fraud is proven.
WA Life Insurance
a) Cancel the policy b) Pay age-corrected benefits c) Pay full benefits as stated in the policy d) Bill the policyowner for back premiums Answer: b) Pay age-corrected benefits
The misstatement of age or sex provision allows the insurer to adjust the benefit payable if the age or sex of the insured was incorrectly stated when the application for the policy was made. In that case, benefit amounts payable will be what the premiums paid would have been had they been purchased at the correct age or sex. Since a life insurance policy's premiums are based largely on age and sex, if the policyowner had been paying lower premium rates (based on incorrect information), the policy's proceeds would need to be adjusted accordingly. The difference between what the individual should have been paying and what was actually paid would be deducted from the death benefit paid to the beneficiary. The provision is an exception to the Time Limit on Certain Defenses provision as it will be affected whenever the error is discovered, even beyond two years. See, in life insurance, a unit is usually considered to be a $1,000 of coverage. So, you may get charged $5 per unit purchased. This is known as the rate. The rate for a 25-year-old male may be $1 per unit ($1,000 of coverage purchased), and the rate for a 50-year-old may be $5 per unit. So, an applicant would lie about their age and say they are younger than they actually are to get a lower rate and, in turn, premium. How does the misstatement of age protect the insurance company?As you learned above, an applicant would lie about their age when applying for life insurance because the older you are, the more expensive life insurance is. Why? Life insurance pays out when you die. The older you are, the closer you are to death, and the higher the risk is for the insurer to cover you. Therefore, the higher the cost. The misstatement of age provision allows the insurer to modify what they pay out in a death benefit if it was found that the insured lied about their age when they purchased the policy. When will the misstatement of age provision apply?This clause applies for the length of the policy period. When will an insurer find out if an applicant lied about their age when purchasing a policy? When the applicant dies. To collect on life insurance, the policy beneficiary must submit proof of loss to the insurer. What’s considered proof of loss? A death certificate. Once the insurer obtains the death certificate, they can verify the age of the insured. How does the misstatement of age clause allow the insurer to modify the death benefit?You must know this for the insurance licensing exam. What will happen if an applicant lies about their age when they buy life insurance and  Misstatement of age allows the insurer to adjust the death benefit up or down based on what the premium the insured was paying would have bought them had they told the truth originally. Think of it this way. The insurance company goes back to day one, removes the untrue age, and inserts the correct age. Based on that age, how much coverage would the individual have had? Does the misstatement of age clause cause the death benefit to go up or down?That depends on whether the applicant lied and said they were younger or older than they actually were. Wait a minute, why would you lie and say you are older than you actually are when buying life insurance? You wouldn’t. But, if you did, it would cause your death benefit to go up when you died, as you were paying more than you should have. In reality, insurers created the misstatement of age clause to reduce death benefit payouts should it be found that an insured lied about their age, stating they were younger than they actually were when they bought the policy. Is there such a thing as a misstatement of gender clause?Yes. It is usually lumped together with the misstatement of age provision in a misstatement of age or gender clause. It allows the insurer to modify the benefit payable if the applicant were to misstate their gender when applying for life insurance. What will an insurance licensing exam question about misstatement of age look like on the insurance test?Kind of like this: Which of the following is true about the misstatement of age provision? A. It allows the insurer to change the premium B. It allows the insurer to contest a claim during the first two years C. It allows the insurer to adjust benefits D. It allows the insurer to void the contract Answer: C Explanation: A life insurance claim may not be contested for misstatement of age. However, if the insured were to understate their age to obtain a lower premium, at their death, the insurer will adjust their benefits according to what the incorrect premium would have purchased at their correct age. The misstatement of age clause applies indefinitely. What else can help me prepare to pass my insurance licensing exam on my first attempt?If you need any help preparing to pass an insurance licensing exam, we have some excellent courses which are primarily video-based. Check out our available courses now: Insurance Licensing Exam Prep Video Training Courses Other tips to help you pass your insurance licensing exam on your first attempt: Insurance Exam Test Taking Tips Also, check out our definition and question of the day videos on our YouTube channel: PassMasters Insurance Exam Prep YouTube Channel |
What is an insurer required to do when faced with an error made under the misstatement of age
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