Texas life insurance applicants need to understand that the application and resulting policy are a binding, legal contract between the policy owner and the life insurance carrier. A contract is an agreement between two or more parties in order to create a legal obligation. The policy states the responsibilities for each party in the contract. The policy owner will pay an agreed amount of premium and upon the death of the insured; a specified death benefit will be paid to a named beneficiary. Inaccurate disclosures in an application can be used to rescind coverage because the resulting policy was entered into by the Texas life insurance carrier under false pretense. The decision to offer coverage by the life insurance carrier was based on disclosures that, if materially incorrect, would allow the carrier to terminate the policy and eliminate the legal obligation to pay the death benefit.

When a carrier terminates a Texas life insurance policy, the coverage will be rescinded. Rescission of a life insurance policy means that the life insurance carrier is unmaking the contract with the policy owner. Rescission of a life insurance policy typically results in a return of premium, which completely releases the carrier of any responsibility to pay a death benefit. Depending on the state, there is typically a two-year or a three-year period during which the life insurance carrier has to identify that fraud has been committed when applying for a life insurance policy. The two- or three-year period is known as the contestability period. The life insurance carrier has the right to terminate the policy if the misrepresented information identified would have resulted in either declining the coverage or assigning a higher premium.

Misrepresenting information on a life insurance policy creates a situation of uncertainty during the contestability period because payment of the death benefit, which is the purpose of obtaining life insurance, can be denied with the rescission of the policy possibly resulting in the beneficiaries receiving nothing.

When submitting information for underwriting, the applicant should not be concerned about minor health conditions that occurred in the past, especially the distant past. The life insurance carrier is concerned about material misrepresentation, which is the deliberate hiding or falsifying of a material fact. Examples of material misrepresentation would include not disclosing tobacco use, a past significant health issue, a citation for a motor vehicle offense such as driving under the influence, or treatment for substance abuse. If the policy is still in force and the benefit claim is the result of a medical event with no relationship to the material misrepresentation, then the death benefit cannot be denied, even within the two- year contestability period.

A Texas life insurance applicant should always practice full disclosure even if the information may result in a declination. Regardless of the health condition or possible infractions, there are carriers that specialize in hard-to-write cases and will increase the premium to account for the additional risk. In the end it is better to pay a higher premium than to risk a rescission that will result in the insured losing life insurance coverage.

Tim Jarvis is a licensed and experienced Texas life insurance agent who focuses on educating his fellow Texans on the best way to shop and quote Texas life insurance coverage