A recent court case in Colorado illuminates one potential problem when a life insurance application contains erroneous information.
Here are the facts:
- A life insurance agent miswrote the age of the insured/applicant on the application. He made her six years younger than she really was.
- The applicant/insured reviewed and sign the application.
- She subsequently passed away, and the beneficiary filed a claim.
- In processing the claim, the insurance company realized the error. They paid the beneficiary a reduced amount based on the actual age and premium collected.
- The beneficiary sued them on the grounds that the mistake was unintentional.
- A court ruled that the misstatement of age did not have to be intentional in order for the company to reduce the benefit. They did this as per the terms of the contract, which were written according to state law.
What we learn from this:
Misstatement of age can be such a common mistake that life insurance policies have provisions to handle that. Whether or not the mistake was intentional is irrelevant.
Less common misrepresentations may not be so cleanly handled. Nondisclosure of medical conditions or treatment, or of lifestyle risks such as adventurous hobbies, could result in the refusal to pay a claim.
Prequalification is essential for ensuring full disclosure by the potential applicant. After going through prequalification, all parties involved can sleep at night knowing that erroneous information will not come back to haunt the beneficiary.
Are you 100% sure you went through full disclosure on your life insurance application?