Texas General Lines — Life, Accident, Health and HMOLife InsuranceHard
A life insurance applicant intentionally provides false information about their medical history on the application. The policy is issued, and two years later, the insured dies due to a condition that would have been discovered if accurate information had been provided. What will likely happen regarding the policy's payout?
- AThe policy will be reformed to reflect the true medical history, and a reduced death benefit will be paid.
- BThe policy will pay the full death benefit as the incontestable clause has expired.
- CThe insurer will pay the full death benefit but will subsequently sue the estate for fraud.
- DThe insurer will deny the claim and return the premiums paid due to material misrepresentation.
Show answer & explanationAnswer & explanation
Correct answer: B. The policy will pay the full death benefit as the incontestable clause has expired.
The incontestable clause typically states that after a policy has been in force for two years, the insurer cannot contest its validity or deny a claim based on misstatements in the application, even if they were fraudulent, unless the fraud involved impersonation. Since two years have passed, the insurer must pay the full death benefit.
Why the other options are wrong
- A. Reformation is less common for simple misstatements after the incontestable period; the clause prioritizes policy stability.
- C. Insurers typically cannot sue for fraud after the incontestable period has passed; the clause protects beneficiaries.
- D. This would be the outcome if the death occurred within the incontestable period and the misrepresentation was material.
Incontestable Clause
A provision in a life insurance policy that prevents the insurer from denying a claim due to misstatements or fraud in the application after the policy has been in force for a specified period (usually two years).
- Protects policyholders/beneficiaries
- Typically 2-year period
- Applies even to fraudulent misstatements (except impersonation)
- Ensures policy validity after period
Memory trick: After 'two years', the policy is locked-in, no more 'fights' from the insurer.