The law gives the insurance a time frame to contest the validity of life policy. Since insurance are governed by state laws and have to adhere to state regulations as laid by the commissioners of the insurance, most state give an insures a two years time frame to contest validity of the policy. The incontestability eliminates the insurer right to deny their obligation on policy after the grace period of contestability has passed for any other reason other than non payment of the policy. The insurer cannot reside the contract on basis of fraud or mistake or use fraud or mistake as defense against claim. The limit time on contestability of the policy is based on the argument that the insurer has enough resources to find mistake or fraud on application within a given time.
If by mistake or intentionally an applicant of insurance life policy misstate his/her age or sex, insurance company cannot contest the policy. In such a situation the available option to insurer is to pay benefits which would align to sex and age of the insured if the facts were truthfully stated at the time of policy application. The policy is not affected by incontestability clause because the insurer is correcting the policy and not contesting its validity.
Due to the possibility of the insured or policy holder being late with premiums payment, there is a grace period allowed on the policy after the premiums are due. In case of dearth occurring during the grace period the death benefits are paid in full less the premiums. The grace period is usually 30 or 31 days after premiums due dates and during the grace period the due premiums can be paid without a penalty or prove of insurability.
Where a life policy lapse because of non payment of premiums and cash value is not yet surrendered, within a specified time usually three years, the policy can be reinstated. Same contract can be put back, but insurer usually requires prove of insurability. The policy holder has to pay past due premiums plus interest on premium, if the time period has expired; a new contract has to be issued. The advantage of reinstating an existing contract it is because the premiums remains at level based on insured original age. Premiums are based on age and the older the insured the higher the premiums. Also the advantage to the insured and beneficiaries is that suicide clause might not begin again.
To prevent the policy from lapsing because of intentional or unintentional non payment, the policy provides automatic loan provision clause allowing the insurer the power to apply cash value as a loan bearing interest against policy to pay due premiums. This option is applicable only for the policy with cash value. The provision can serve to the advantage of a policy owner experiencing financial difficulties by extending the validity of life policy beyond the grace period.
Some of states such as California provide a code requiring the insurer to avail loan to be borrowed against policies which build cash value. The policy has to be in force for specified period of time before the policy owner exercises the option to take a loan for a guaranteed cash value on the contract. The policy owner should avoid being caught in situation where non payment of loan and interest results into loan amount greater then cash value of policy which can result into cancellation of the policy.
The incontestability of policy allows the beneficiary to benefit from the life insurance policy where there might have been a mistake or fraud on part of insured. The insurer has ample time and resources to discover such mistake or fraud without punishing the beneficiary.