When purchasing a life insurance policy, the policyholder aims to provide an extra layer of financial protection and peace of mind for their loved ones. However, since life insurance companies are incentivized to minimize risk, they will frequently look for reasons to cancel a policyholder’s coverage. This can put their financial security at risk and force them to evaluate other alternatives. Policy cancellation due to misrepresentations during the contestability period, nonpayment of premiums, and termination of employment are three of the most common reasons why a life insurance company may revoke coverage.
The Contestability Period
The contestability period is a timeframe during which a life insurance company can review and fact-check information on a policyholder’s life insurance application. During this period, insurers may investigate details and cancel a policy if they find discrepancies. It typically lasts two years from the policy’s effective date in most states, although some (e.g., Missouri) limit it to one year. The contestability period is usually invoked to deny claims after the insured’s death but also allows insurers to investigate and cancel active policies deemed high-risk.
If a policyholder omitted any information on their life insurance application, such as a pre-existing illness, medical condition, or hospital visit, the life insurance provider has the right to investigate these statements and cancel the policy if any undisclosed details are found. Unless fraud is suspected, the insurer typically avoids canceling coverage while the policyholder is alive, as they will likely outlive the contestability period.
Termination of Coverage/Lapse
The most common situation in which a life insurance company may cancel your policy is due to nonpayment of premiums if you fail to make one or more of your scheduled payments. Your coverage is unlikely to be canceled immediately if you send payment a few days late, as most life insurance policies allow for a “grace period” of at least fifteen days. As long as the insurer recieves payment within this timeframe, your policy remains active.
However, if the grace period expires, a life insurance company can cancel your policy due to lapsed coverage. In this case, you must contact your insurer and meet specific conditions to restore your policy. This often involves paying all missed premiums retroactively to reinstate coverage.
Termination of Employment
Many people receive their life insurance through “group life insurance plans” offered by their employers. A life insurance company can cancel your policy when you are no longer considered an active employee, resulting in the termination of coverage along with your employment. This often occurs when employees go on disability and are thus no longer considered “active,” even though they remain technically employed.
In these situations, it may be possible to request that the insurance provider convert your group policy to a privately owned, individual life insurance policy. This often requires paying higher premiums and meeting specific conditions determined by the company.
If your life insurance company cancels your policy, you may have options to reinstate it or buy a new one. However, if the policyholder passes away before reinstating coverage, legal recourse may be necessary. If a life insurance company wrongfully cancels a policy, it’s best to contact an experienced life insurance lawyer to review the case.
