An Omission on Your Life Insurance Application Could Cost Millions

Would you fudge a fact or mis-state it just a little to get an important application approved?

It's common for people to omit or forget facts on a life insurance application. But don't let it happen to you or your policy could be worthless. Potentially, that could be hundreds of thousands or millions depending on the size of your policy.

Statements or omissions you make on a life insurance application become part of the insurance contract. The answers to the questions are treated as "representations". That is, you represent something to be true; you're stating that to the best of your knowledge, it's true, regardless of what may actually be true. So fudging is a no-no.

For example, say that a person had answered a question on a life insurance application stating that he had never been treated for or diagnosed for any disease or uninvestigated conditions. But 8 months after applying for the policy, dies of lung cancer. An autopsy determined that the tumor had started growing well before he had applied for insurance but the company would still have to pay the claim as he had no idea of the tumor.

On the other hand, had this person gone to a doctor and been advised that there was something needing further investigation on an Xray, and then had gone out and applied for life insurance, then died 8 months later, it would be a different story. And had this person "omitted" the name of the doctor, or the fact that he had gone to see this doctor, this life insurance application omission would probably cause the death benefit to be denied.

Secondly, with life insurance, after a policy has been in force for two (sometimes three) years, in the absence of fraud, the policy becomes incontestable. But in the case of willingly withholding information, a case can be made for fraud. The burden of proof is on the insurance company that there was fraudulent intent involved. This provides further protection to the insured's beneficiaries especially since life insurance policies may stay in force for many years and it would be almost impossible to trace back the exact facts at the time of application.

But be sure, that if you have a one million dollar policy, the insurance company will look hard to determine if the cause of death may have existed and been known, yet intentionally omitted, on the application. This would be life insurance fraud and the insurance company would rightfully deny the claim. As stated above, that may cost the family hundred of thousands or millions of dollars.

Now assume that our insurance applicant was told by his physician that he had a suspicious spot on his chest X-ray. He then went out and applied for life insurance and correctly listed this doctor's name, the date he had seen him, and the fact that a suspicious growth had been noted. Later when the insurance company ordered the medical records and saw that there was some question as to the diagnosis of this "spot", the company would probably either "postpone" issuing the coverage until a definitive diagnosis could be made, decline the coverage or "rate" the policy meaning charge a higher premium.

Also, assuming the company was a member company of the Medical Insurance Bureau (MIB) (this author knows no life insurance companies that do not belong to the MIB), the underwriter would enter a code which indicates, "Chest X-ray, pulmonary (lung field) abnormality." This serves as a "red flag" to another underwriter at any other insurance company that this condition was unresolved.

If our applicant applies to another insurance company but omitted this doctor's name on the life insurance application, or even the fact that he had been to see him, the new company (as a member of MIB) would run an MIB check and this information would come up as a code. So the good news is that quite possibly, the insurance company may become aware of a medical condition that you forget to list. They will learn of it either through MIB or when they get a copy of your physician's records. In such a case, the insurance company cannot later claim any fraud as they had the negative health information and issued the policy. But the best "insurance" is to make sure you answer every item as completely as possible on a life insurance application.