Term Life Insurance Articles
How A Contestable Clause Affects The Value Of Term Life Insurance
2011-08-10
A contestable clause is a standard part of a life insurance contract, which protects the policyholder. Unfortunately, many buyers don't understand how contestable clauses work or how they can affect term life insurance value. The basic function of a contestable clause is to prevent a term life insurance company from unfairly canceling a policyholder's coverage, due to inaccurate information on the buyer's application. Each contestable clause has a set period, usually two years, in which a buyer's policy could be canceled due to inaccurate or misleading info on an application. After this time period has expired, the insurance company has to abide by the original agreement, regardless of whether the buyer intentionally or unintentionally withheld information.
The purpose of a contestable clause is to protect the rights of the policy buyer. When a contestable clause has a longer period, term life insurance value can also be lower. A policy with a three yearlong contestable clause is less valuable than an identical policy with a two-year clause. However, most term life insurance companies use a two-year length for contestable clauses, and it's fairly rare for insurance companies to use any other time limit. Even when a different time limit is used, this rarely has a major effect on policy value. A contestable clause is important and state law generally requires it. In addition, the exact terms of the clause do not tend to vary.
It's important to realize that a contestable clause, in no way, endorses a deliberate attempt to mislead an insurance company. Contestable clauses are in place to prevent abuse on the part of the insurance provider. Insurance companies will almost always detect major factual errors in health insurance applications within the first two years of coverage. This is especial true for buyers that have withheld information about pre-existing conditions, or misrepresented their age. Term life insurance premiums may rise if a buyer lies about age, even if the contestable clause period has passed.
When purchasing a term life insurance policy or viewing quotes, it's important to consider every clause and exclusion. This enables you to get a sense of the policy's real value, and how a payout occurs if a claim is ever made. Every buyer should be sure to understand how a contestable clause works, and why it's an important part of a policy. However, as important as contestable clauses are, they're similar enough that they don't have a huge effect on policy value, especially when compared to factors like death benefits and the buyer's health history.
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A contestable clause is a standard part of a life insurance contract, which protects the policyholder. Unfortunately, many buyers don't understand how contestable clauses work or how they can affect term life insurance value. The basic function of a contestable clause is to prevent a term life insurance company from unfairly canceling a policyholder's coverage, due to inaccurate information on the buyer's application. Each contestable clause has a set period, usually two years, in which a buyer's policy could be canceled due to inaccurate or misleading info on an application. After this time period has expired, the insurance company has to abide by the original agreement, regardless of whether the buyer intentionally or unintentionally withheld information.
The purpose of a contestable clause is to protect the rights of the policy buyer. When a contestable clause has a longer period, term life insurance value can also be lower. A policy with a three yearlong contestable clause is less valuable than an identical policy with a two-year clause. However, most term life insurance companies use a two-year length for contestable clauses, and it's fairly rare for insurance companies to use any other time limit. Even when a different time limit is used, this rarely has a major effect on policy value. A contestable clause is important and state law generally requires it. In addition, the exact terms of the clause do not tend to vary.
It's important to realize that a contestable clause, in no way, endorses a deliberate attempt to mislead an insurance company. Contestable clauses are in place to prevent abuse on the part of the insurance provider. Insurance companies will almost always detect major factual errors in health insurance applications within the first two years of coverage. This is especial true for buyers that have withheld information about pre-existing conditions, or misrepresented their age. Term life insurance premiums may rise if a buyer lies about age, even if the contestable clause period has passed.
When purchasing a term life insurance policy or viewing quotes, it's important to consider every clause and exclusion. This enables you to get a sense of the policy's real value, and how a payout occurs if a claim is ever made. Every buyer should be sure to understand how a contestable clause works, and why it's an important part of a policy. However, as important as contestable clauses are, they're similar enough that they don't have a huge effect on policy value, especially when compared to factors like death benefits and the buyer's health history.
