Last updated: March 20th, 2023
Reviewed by
Grant Desselle
Licensed Insurance Agent
Contestability periods are a period of time inside every insurance policy that allows for the insurance company to cancel or augment a life insurance policy if misrepresentation or fraud is discovered on the part of the insured.
In the whole life insurance world, there are two concepts that often confuse many people: What is the difference between graded benefits and a contestability period?
While the two may sound alike to some, the meanings are different in regards to how they apply to a life insurance policy.
Graded benefit is a term used largely in final expense insurance and guaranteed issue life insurance type policies where the death benefit of the policy is suspended for the first two to three years unless the death is accidental. Since these types of policies typically are sold to older individuals with no underwriting, this type of caveat inside a life insurance policy helps protect the insurance company from having to pay out benefits on a claim where the death was due to natural causes that otherwise would have been detected through a traditional fully underwritten policy with a medical exam. Graded whole life insurance policies are often meant for people who are unable to get a standard type of life insurance policy or who are older with a life expectancy between 2-10 years.
With a graded premium life insurance, during the waiting period, you receive a refund plus interest (up to 10% and varies by company) on the premiums paid if there is a death within the graded benefit whole life period. This ensures that the policyholder will at least get their money back if the policy doesn’t payout.
The terms graded and modified whole life insurance are used interchangeably among final expense insurance companies.
Other companies may offer percentages of the face value on the policy which gradually increase over the first few years. For Example, 30% of the face value in year 1, 75% of the face value in year 2, and 100% of the face value on year 3.
The graded benefit structure can vary from company to company, so it is best to work with an independent life insurance agent who can best navigate the marketplace to find the best option for you.
A contestability period is a window of time, generally two years, after a life insurance policy goes into force that allows for the life insurance company to investigate the accuracy of information the application prior to paying a claim. During this time, the insurance company can deny or reduce the death benefit in the event there has been misrepresentation discovered when underwriting your life insurance application. In these types of situations where a person dies during the contestability period, the payout to beneficiaries may be slower as the insurance company does its due diligence to ensure the information on the application was correct.
Steve applies for a life insurance policy and lies about being a smoker. The policy is approved and issued at non-smoker rates; however, he dies a year later due to aggressive lung cancer. The insurance company can review the application and choose to deny coverage and issue a refund of premiums instead because he was dishonest during the life insurance application process.
In the event that you die and the information on the application is correct, the insurance company is required to pay the death benefit per the terms of the policy, as it is a legal contract. Keep in mind that life insurance companies can still deny coverage in the event that there were fraudulent acts or information provided during the application process, even after the contestability period expires.
While the contestability period is usually two years on most insurance policies, the suicide clause is completely different and has nothing to do with contestability. In this case, death resulting from suicide is not covered for the first two years and will only provide a return of premiums paid; however, suicide after this two-year period is generally covered and pays the full death benefit.
Not every policy has a graded benefit, but almost every life insurance policy has a contestability period. Both of these structures provide a level of protection for the life insurance company and for the consumer in an attempt to keep rates low and discourage fraud and abuse inside the insurance industry. Without both of these setups, paid-out claims would cause there to be inflation in pricing and stricter underwriting guidelines that could severely limit the amount of risk an insurance company would be willing to take on.
Brian is the founder and CEO of Insurist and carries Life, Health, and Property & Casualty licenses in all 50 U.S. states. Since 2013, Brian has been a member of Million Dollar Round Table, a designation for the top 1% of financial advisors worldwide. Brian has been featured in Yahoo! Finance, Money.com, Entrepreneur.com, Life Happens, Forbes, MSN, and Good Financial Cents. Brian’s goal is to show customers the best products, the quickest answers to their questions, and provide expert advice.
Grant's past experience includes work as a licensed sales agent for Hagerty Insurance. He has reviewed thousands of existing auto policies across the nation and issued hundreds of new ones on everything ranging from classic cars undergoing restoration to modern exotics and motorcycles.
