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Are there any consequences for lying on a life insurance application?

Most life insurance policies have a two-year contestability period that allows a life insurance company to deny a death claim if it discovers that a policyholder lied about a medical condition on his or her application. For example, let's say you were a smoker but you did not disclose it on your application. If you died from lung cancer within two years of buying the policy, the insurer could have grounds to not pay the death benefit from your policy.

An insurance company also has the right to deny or amend the payment of a policy after the two-year contestible period if the applicant made a "material misrepresentation" on the application. The exact decision depends on what was misrepresented and how it would have affected the underwriting decision.

If a policyholder lies on an application and dies after the two-year contestability period, the insurer could still pay a death claim equal to the amount of life insurance you would have purchased if you had disclosed your medical condition. For example, let's say you paid $500 a year for a $100,000 policy, and you died from lung cancer five years after you applied for coverage.

If you weren't paying a smoker rate, the insurance company could pay your beneficiary a death benefit less than $100,000. But that's rare, says Jack Dewald, chair-elect of the Life and Health Insurance Foundation for Education.

Beyond the two-year contestability period, Dewald says if the insurer were to consider not paying a death claim, they would allege (and have to prove) fraud on the initial application.

"The burden of proof is quite high. That said, the option to allege fraud is still there, however minimum it is. Of course, a good agent is always going to urge his/her applicant to be truthful and upfront on the initial application."

Also, a database of life, health and disability application data maintained by MIB helps insurers flag fraudulent answers on applications.

Last updated: Dec. 7, 2009