What You Should Know About Life Insurance Contestibilty

There are large sums of money involved with life insurance and the industry needs to protect against people setting up fraudulent policies and transactions. There are three  concepts that must be understood as they relate to a senior life settlement. They are; Insurable Interest,  Rescission, and Contestability,.

Insurable Interest and Life Settlements

“Insurable interest” is deals with the legal legitimacy of a life insurance policy and its beneficiary. The intention of life insurance is to provide a financial payment to the beneficiary after the death of the insured. The beneficiaries are typically the family, descendents, heirs, employers, businesses, business partners and charities of the insured. These are legitimate beneficiaries that qualify for “Good Insurable Interest”.

For a life insurance policy to have legitimate good insurable interest, it is required that at the time of purchase, the intent was to benefit a legitimate beneficiary. If it can be shown that a policy was bought with the sole intention of making a life settlement then this would be considered “bad insurable Interest” or a “lack of insurable interest”. In this situation, the policy was issued on fraudulent grounds and the applicant was acting as an agent on behalf of an investor and NOT for the reasons listed on the application form. This situation has the potential for a recession at any time. This could also lead to a contested death claim at any time well beyond the 2 years of contestability.

Contestability Period and Life Settlements

• The contestability period is the first two years a new life policy is in force. During this two-year period;
  • A death claim may be denied or “contested” due to a fraud on the life insurance application or the suicide of the insured.
  • The life settlement value of a policy is typically higher after the contestability period. 
  • An overwhelming majority of life settlement buyers will not purchase policies during the contestability period.
  • Life insurance companies don't like life settlements but are particularly averse to life settlement transactions during the contestability period.

  Seniors should be aware that life insurance companies are not proponents of  life settlements. The fact is that life insurance companies profit greatly when a policy lapses without them having to pay a death benefit. When a policy is sold to an investor in a life settlement, it becomes a virtual certainty that the policy premiums will be paid and the death benefit will have to be honored. Also, professional investors pay the absolute minimum premiums until the anticipated death of the insured. These factors lower life insurance company profits.

  Seniors have every right to sell their life insurance policies that have been acquired legitimately and the life settlement market provides them a profitable avenue to do that. However, seniors cannot just buy life insurance with the intention of selling it in a life settlement to make money. To do so may be fraudulent because life insurance applications all ask the intent of the buyer.

   

  Rescission of Life Insurance and Life Settlements

  A rescission is a cancellation of the life insurance contract by the issuing life insurance company. If during the two year contestability period the life insurance company suspects fraud it can rescind the life insurance policy. If the fraud is related to a lack of insurable interest at the time the policy was issued, the recession can take place at any time. Obviously, life settlement investors will only purchase policies that they believe are in good standing and without any fraud in the origination.

  In order to rescind a policy the following conditions need to be met.

  • No death has occurred; i.e, the insured is still alive.
  • The company believes a fraud or misrepresentation was perpetrated on the application.
    • Medical information misstated.
    • Financial information misstated.
    • A misstatement of purpose that indicates bad insurable interest.

   

Arranging a life settlement in advance as part of buying a life insurance policy may lead to fraudulent statements on the life insurance application which in turn may lead to a finding of bad insurable interest which in turn may lead to policy rescission and/or a contested death claim.

Each state is responsible for creating and enforcing insurance laws and regulations. As a result the laws differ state by state and it is important to use experienced life settlement  attorneys to ensure that all laws are being adhered to. Florida has some of the strongest life settlement laws: It is a felony to solicit life insurance for the purposes of creating a life settlement.

• In most states insurable interest must exist only at the time a policy is issued. Afterwards, any owner and beneficiary are just as legitimate as the original beneficiary.
• Bad insurable interest at the time a policy is issued is a potential reason for a CONTESTED DEATH CLAIM or a policy RESCISSION at any time.
• A fraudulent statement on the initial life insurance application related to insurable interest could lead to a policy rescission or contested death claim many years AFTER the contestability period has gone by.