It is well-known that insurance applications ask about the smoking of tobacco. Here is an example:
1 Do you use tobacco in any form? 2 If yes, what type of product(s) have you used? 2a Cigarette? 2b Cigar ? 2c Pipe? 2d Smokeless? 3 Are you currently using a nicotine delivery system? 4 Has the proposed insured used nicotine in the past 12 months?
It is also well known that smokers can pay twice the price (or more!) as non-smokers. Clearly, there is a big financial incentive to get non-smoker rates.
So do people lie about their smoking when they apply for life insurance? Take a guess.
The answer is yes, many do. A recent study James Palmier, MD, of Quest Diagnostics shows that not only do people lie, but most of the lying takes place within specific groups of people: males below age 30 and above age 60, who reside in certain states, and who purchase face amounts of $500,000 and higher.
Why is that? Here is one explanation provided by Dr. Palmier:
A possible reason behind these findings (other than overt misrepresentation) may be that young adults self-identification as users remains ambivalent, while in old ages, embarrassment from non-compliance with medical orders to abandon the nicotine habit mounts.
So younger people aren’t quite sure if they consider themselves smokers – even if they do smoke – and older people don’t want to admit it because their doctor had told them to stop.
Can all this misrepresentation effect the rates for life insurance? Dr. Palmier says yes, indeed, it can:
While the majority of biochemically confirmed tobacco users accurately report their status (self-reporting sensitivity is 80.7%), the remaining large minority of false-negative self-reporting cases would be more than sufficient to undermine the pricing assumptions of most life insurance products if accepted as truthful by underwriters.
It’s pretty simple: underwriters are basing rates on what they believe to be truthful disclosures by applicants. Unfortunately, so many smokers are not being truthful that these assumptions are thus being undermined. So what would happen then? Very possibly a huge rate increase when your term policy renews, as well as a huge increase in new business rates for new applicants.
They say that the truth hurts, but in this case, the untruth can hurt more. What do you think about this situation?