What if a person lies about smoking or tobacco use when applying for a life insurance policy?

If an applicant for insurance were to lie about his or her smoking or tobacco use when applying for the life insurance policy, and then die within 2 years of the policy’s issuance – regardless of the cause of death and even if the death was due to something totally unrelated to the matter about which the applicant lied (such as in a plane crash) – the life insurance company could deny the claim and the beneficiaries would not collect anything on the life policy on the grounds that the applicant made a material misrepresentation about a material risk factor when applying for the policy. (However, see "Death After Two Years" below.)  

Smoking is a known hazard that significantly increases a person’s risk of death or illness. That is why, when evaluating a person’s application for an individual policy of insurance (called “underwriting”),  nearly every life insurance company asks about the applicant’s smoking and tobacco history along with a series of questions about the applicant’s health.  

Just because an applicant smokes does not mean he or she cannot buy life insurance. Smokers and other individuals with significant health conditions may still get life insurance, but will likely be charged a higher rate to account for the greater risk involved. Although each life insurance company sets its own rates and practices, people who have stopped smoking for several years and no longer use any form of tobacco are typically charged less than active smokers.

Why Deny All Benefits?

It may seem harsh to deny a beneficiary any of the proceeds of a life insurance policy just because the policyholder lied about smoking in his or her application. Why not just scale down the benefits received to what the higher premium would have bought had the policyholder told the truth? While this may seem a more just outcome for the beneficiary, most courts have concluded that there are strong public policy reasons supporting the complete denial of benefits. As one federal appeals court said, “If the only consequence of a fraudulent misrepresentation in a life insurance application is to reduce the amount paid under the policy, there is every incentive for applicants to lie. If the lie is undetected during the two-year contestability period, the insured will have obtained excessive coverage for which he has not paid. If the lie is detected during the two-year period, the insured will still obtain what he could have had if he had told the truth. In essence, the applicant has everything to gain and nothing to lose by lying.” The court noted that “the victims will be the honest applicants who tell the truth and whose premiums will rise over the long run to pay for the excessive insurance proceeds paid out as a result of undetected misrepresentations in fraudulent applications.”

How Will the Insurance Company Find Out About the Applicant’s Smoking?

How would the life insurer find out if the applicant lied about smoking or tobacco use? The life insurer will likely have the applicant examined by a paramedic or even a physician, particularly with higher face value policies. The applicant will be asked to take a blood and urine test and his or her medical will likely be reviewed before the issuance of the policy, and that often reveals a history of smoking. Further, nearly all life insurance companies are members of an organization known as MIB (formerly the Medical Information Bureau) and share with MIB certain information uncovered during the underwriting process, and receive back certain information previously submitted by other insurers to MIB. Most importantly, if the insured were to die within 2 years of policy issuance, the life insurer would almost always do a claims investigation to determine if the statements the insured made in the application were truthful, and the insurer is likely to deny claims where the applicant made a material misstatement of fact.

Death After Two Years

If the insured person were to die after the policy is in force for 2 full years, the life insurer would be obligated to pay the full benefits, notwithstanding the fact that the applicant lied, because all life insurance policies issued in the United States contain an “incontestable clause” that prohibits a life insurer from denying claims after 2 years from the date the policy became effective. (If the life insurer were to discover that the person lied about something material within the 2 years it could “rescind” the policy based on the insured’s material misrepresentation of fact.

Recourse if Denied Benefits

Beneficiaries who are denied life insurance proceeds because the life insurer claims that the applicant made a material misrepresentation are not without recourse. The insurance company’s conclusion is not the last word. Even though the applicant may have made a misrepresentation, that does not necessarily mean the misrepresentation was necessarily made by the applicant, that it was sufficiently “material” (as determined under state law), or that the insurer did not or should not have known about the misrepresentation from other information in its files at the time it issued the policy.  A lawyer, particularly one experienced in life insurance law and insurance company practices, often can assist beneficiaries recover on claims life insurers otherwise would deny.