How long after its effective date will an individual life insurance policy become incontestable

The Office of General Counsel issued the following informal opinion on February 6, 2002, representing the position of the New York State Insurance Department.

Re: Incontestability of Individual Life Insurance Policies and Individual Long Term Care Insurance Policies

Questions Presented:

1) After two years, even if there is a misrepresentation on a life insurance policy application, does the policy still have to be paid?

2) After two years, even if there is a misrepresentation on a long term care insurance policy application, does the policy still have to be paid?

Conclusions:

1) N.Y. Ins. Law § 3203(a)(3) (McKinney 2000) provides that an individual life insurance policy must contain a provision that the policy shall be incontestable after being in force during the life of the insured for a period of two years from its date of issue. However, whether or not an individual life insurance policy is incontestable after being in force during the life of the insured for a period of two years from its date of issue depends on the facts.

2) The conclusion concerning incontestability of individual long term care insurance policies depends on whether or not the policy is tax qualified for Federal income tax purposes.

Facts:

No specific facts were provided.

Analysis:

N.Y. Ins. Law § 3203(a)(3) (McKinney 2000) provides that an individual life insurance policy must contain a provision that the policy shall be incontestable after being in force during the life of the insured for a period of two years from its date of issue. However, there are a number of cases interpreting this, providing exceptions to the above provision. Thus, whether or not an individual life insurance policy is incontestable after being in force during the life of the insured for a period of two years from its date of issue depends on the facts.

An insurer that writes accident and health insurance may be authorized by the Superintendent to issue long term care insurance policies. N.Y. Ins. Law § 1117(a) (McKinney 2000).Pursuant to N.Y. Ins. Law § 3216(d)(1)(B)(i) (McKinney 2001-2002 Interim Pocket Part) individual accident and health insurance policies must contain an incontestability provision that limits the insurer to a two year period from the date the policy is issued to deny a claim or rescind the policy based upon the insured's misstatements on the application, except for fraudulent misstatements. Thus, if the insured of an individual long term care insurance policy that is not tax qualified for Federal income tax purposes provides a misstatement on the application, the insurer may deny the claim or rescind the policy for up to two years after the policy is issued, except that if the misstatement is fraudulent, the insurer may deny the claim or rescind the policy after the two year period.

A tax qualified long term care insurance policy may be tax deductible for Federal income tax purposes, as a medical expense pursuant to the Internal Revenue Code. 26 U.S.C.A. § 7702B (West Supp. 2001). Section 7702B(g) incorporates by reference the January, 1993 National Association of Insurance Commissioners (hereinafter "NAIC") Long Term Care Insurance Model Act requirements for tax qualified long term care insurance policies. The relevant components of the NAIC Model Act's incontestability provision, which is applicable to a misrepresentation on the application by an insured of a tax qualified long term care insurance policy, is provided below:

For a policy or certificate that has been in force for less than six (6) months an insurer may rescind a long-term care insurance policy or certificate or deny an otherwise valid long-term care insurance claim upon a showing of misrepresentation that is material to the acceptance for coverage.

For a policy or certificate that has been in force for at least six (6) months but less than two (2) years an insurer may rescind a long-term care insurance policy or certificate or deny an otherwise valid long-term care insurance claim upon a showing of misrepresentation that is both material to the acceptance for coverage and which pertains to the condition for which benefits are sought.

After a policy or certificate has been in force for two (2) years it is not contestable upon the grounds of misrepresentation alone; such policy or certificate may be contested only upon a showing that the insured knowingly and intentionally misrepresented relevant facts relating to the insured's health.

Accordingly, if a New York State long term care insurance policy is to be tax deductible for Federal income tax purposes it would have to be contestable in accordance with the NAIC Model Act.

For further information you may contact Senior Attorney Robert Freedman at the New York City Office.

A "contestable period" is a contractual provision that is often found in a life insurance policy. The contestable period usually covers a period of one or two years from the effective date the insurance policy, depending on the terms actually written on the policy.

Through this provision, the insurance company has the right to contest (to dispute) the validity of the insurance policy and to refuse to pay the death benefit if the insured person dies within the contestable period. The most common reasons are suicide or misrepresentation of the health of the insured person.

Within the contestable period, the insurance company has the opportunity to investigate whether or not a vital misrepresentation has been made. However, after the expiration of the contestable period, the beneficiary of the insurance policy is protected against the contesting of the insurance company (i.e. the policy becomes "incontestable"). In other words, the insurance company will be obligated to pay the death benefit once the contestable period has expired, except where there is fraud (e.g. submitting fake documents during the insurance application or claim process).

Please note that the "contestable period" provision may not apply to supplementary benefits, such as payment of medical or hospital confinement expenses. In addition, life policies can be without any "contestable period" clause at all.

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.

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.

• Most life insurance policies include an incontestability clause.
• An incontestability clause prevents providers from voiding coverage if the insured misstates information after a contestability period, such as two or three years.
• The clock starts to run on the contestability period the moment the life insurance policy is purchased.

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.

• 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.

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.