Question

question #16:
while applying for his life insurance policy, kyle did not reveal that he was diabetic. he was afraid that the insurer might decide not to issue a policy based on his condition. since the face amount was modest, kyle figured the insurer would not conduct detailed checks on his health. three years later, kyle died in a car accident. while processing the death claim, the insurer discovered that kyle was a diabetic and did not disclose the fact in his application. how will kyles death benefit be handled by the insurer?
a) the death benefit will be paid because the policy was in force for more than two years and the contestability period was over.
b) the death benefit will not be paid because kyle committed fraud by not disclosing his diabetes in the application.
c) the death benefit will be paid because kyle did not die due to a condition caused by diabetes.
d) the death benefit will not be paid because kyle did not add an accidental death benefit rider to his policy.
your answer
× the death benefit will be paid because kyle did not die due to a condition caused by diabetes.
rationale:
once a policy has been in force for two years (the incontestability period), the insurer can only cancel it based on a fraudulent misrepresentation or fraudulent concealment. insurance fraud is an attempt to get insurance that would otherwise not be offered or to acquire it on better terms than the applicant was entitled to on a true statement of the facts. it is sometimes described as intentional deception or reckless disregard of the truth. this occurs when the person answering insurance application questions either intentionally answers incorrectly or does so without caring if their answers are complete and/or true. an insurer may cancel an insurance policy at any time for fraud; this includes a claim for a death benefit. the incontestability period will not protect the policy. (refer to section 2.4.1)

Explanation:

To solve this, we analyze the insurance principles:

• The incontestability period (usually 2 years) generally prevents the insurer from canceling a policy due to misstatements, but fraudulent misrepresentation/concealment is an exception. Kyle deliberately hid his diabetes (fraud), so the incontestability period does not protect the policy.
• Option a is incorrect because fraud overrides the incontestability period.
• Option c is incorrect because the cause of death (car accident) is irrelevant—fraud in the application invalidates the claim.
• Option d is incorrect because the accidental death rider is not related to the fraud in the application.
• Option b is correct as Kyle committed fraud by not disclosing his diabetes, allowing the insurer to deny the death benefit.

Answer:

b) The death benefit will not be paid because Kyle committed fraud by not disclosing his diabetes in the application.