West Virginia State Life Insurance Practice Exam

How do life insurance companies handle cases where the insured commits suicide within the contestable period of the contract?

1. Claims are denied under the suicide clause of the policy

2. Claims are automatically paid to the beneficiary

3. Claims are reduced by half

4. Claims are postponed until investigation

The correct answer is: Claims are denied under the suicide clause of the policy

In life insurance policies, the contestable period is a specified time frame—usually the first two years of the policy—during which the insurer has the right to investigate claims that may appear suspicious or questionable. If the insured commits suicide during this period, claims are typically denied due to the suicide clause included in the policy. This clause is designed to protect the insurance company from potential moral hazard, where individuals might purchase insurance with the intent to commit suicide, knowing that their beneficiaries would receive the benefit. The rationale behind this is that insurance policies are based on a principle of risk management and good faith, and the suicide clause serves as a safeguard against claims that arise from self-inflicted mortality, particularly during the initial period when the insurer is still establishing the risk profile of the insured. Other scenarios such as automatic payment to beneficiaries, reducing claims by half, or postponing claims for investigation do not align with standard industry practices during the contestable period. Therefore, the correct approach when an insured commits suicide within that timeframe is to deny the claim based on the explicit terms outlined in the suicide clause.