Contestability Clause Life Insurance

When you purchase life insurance, the initial three years of the contract is very important. This is because of the contestability clause, which allows insurers to reject the death benefit claim if they find some intentional misrepresentations in the policyholder’s application.

A life insurance policy is purchased to provide financial security to the policyholder’s family members in case of any unfortunate circumstances like death or disability of the policyholder. But, if the death happens shortly after taking a policy, that is, within three years from the purchase of the policy, the contestability clause applies.

The contestability - period starts from the commencement of the policy till the end of the duration of three years (from the start date). This clause can significantly impact claim procedure and, hence, must not be ignored by buyers. The insurance firm can question the claim raised by beneficiaries if the policyholder expires within three years of buying the plan. “As per the contestability clause, the insurer can review the application and cancel or deny the claim in this period if any misinformation is found. 

The insurer will communicate in writing to the insured/nominee/legal representative/assignees of the insured, mentioning the grounds on which the decision to reject the policy has been taken.

For instance, you are a smoker but while buying a life insurance policy, you didn’t tell the insurer that you smoke. Now, unluckily, if you die within three years of the policy purchase, the insurer will have the right to investigate your past to verify the authenticity of the information you provided when buying the policy. If the insurer finds you (the deceased insured) gave wrong information, the insurer can reject the insurance amount claimed by your nominee/beneficiary.

It is, therefore, important to disclose all material facts correctly and in good faith to the insurer while purchasing life insurance.

Amendments - Insurance Act has now limited the scope of an insurer to question a life insurance policy after the expiry of three years from its purchase date. Further, it has built-in safeguards in favour of the insured, whereby the insurer will have to return the premiums paid if the insurer repudiates a life insurance contract within three years of the effective date on the grounds of misstatement or suppression of a material fact (except fraud). 

The amendment further provides that the misstatement of or suppression of fact shall not be considered material unless it has a direct bearing on the risk undertaken by the insurer; the onus is on the insurer to show that had the insurer been aware of the said fact, no life insurance policy would have been issued to the insured.