Lying for cheaper life insurance: Short-term benefits and long-term risks

By Elizabeth Renter

One lie could save you hundreds of dollars on term life insurance premiums and possibly be the difference between getting a policy or a denial. However, if you're caught lying, your beneficiaries could be left empty-handed.

Some 16% of U.S. adults in a survey say lying to a life insurer to save money is "acceptable" under certain circumstances, according to a recent NerdWallet report. But weighing the potential benefits versus the costs could make you think twice.

Does dishonesty pay?

How much you pay for life insurance depends on many factors such as the amount of coverage, and in the case of term life insurance, the length of the policy. One of the biggest factors is your life expectancy. Any indication of ill health or future risk can cost you.

Depending on the insurance company and policy specifics, here are some common lies people tell insurers:

Tobacco use. Lying about tobacco use could save you about $1,000 annually, according to a NerdWallet analysis of average term life insurance rates for smokers vs. nonsmokers.

Marijuana use. Depending on the insurance carrier, lying about marijuana use, whether legal in your state or not, could help you avoid higher smokers rates or save you from a policy denial.

Mental health problems. One of the most common health-related lies, according to Adam Beck, professor at The American College of Financial Services, is lying about mental health status. This lie could mean that you'll qualify for better rates or get approved for a policy when you would otherwise receive a denial.

Income. Lying about your income isn't likely to save you money, but the lie could mean that you qualify for a larger-value policy, particularly if you're applying for permanent life insurance.

Family health history. Even if you're healthy, lying about your immediate family's history of certain kinds of cancer and heart disease, in particular, could result in the best rate classifications and possibly save you several hundred dollars annually.

What does dishonesty cost?

The consequences of life insurance dishonesty depend largely on if and when your lie is discovered, Beck says. The underwriting process, when the insurance company determines your life expectancy and resulting rate, exists to determine the insurer's risk and to uncover any discrepancies on your application. The insurance company will see your medical records, prescription-drug history and likely order a medical exam with lab tests.

But if your lie isn't discovered until after you've signed on the dotted line, the timing of its discovery is essential.

There is typically a two-year life insurance contestability period with policies. Misstatements and outright lies discovered within those two years could lead to higher rates, cancellation of the policy or a deduction from the payout to your beneficiaries because of the lie. After two years, insurers could still decide not to pay a death benefit if they discover intentional lies, or fraud, in the application.

If your lie is discovered before your death, however, your premiums likely will be adjusted unless the lie would have resulted in the denial of coverage.

"You both have a vested interest," Beck says. "They want to keep customers, and you want to keep your insurance policy, so a lot of it will depend on the severity of the lie."

Is lying worth the risk?

Dishonesty always comes with the risk of getting caught. But in the case of life insurance, it isn't only your financial security on the line.

"Life insurers have a responsibility to current and future policyholders to fairly and accurately assess risk in addition to fighting fraud," says Whit Cornman, spokesman for the American Council of Life Insurers. "Underwriting risk based on inaccurate information could lead to higher premiums for future policyholders."

Perhaps more importantly, your beneficiaries also stand to lose big. The healthier you seem, the less you're likely to pay, but lying to save a few bucks now could cost your beneficiaries the entire policy payout. Consider your reasons for buying life insurance in the first place and then ask if saving a little now would be worth losing it all later.

Elizabeth Renter is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @ElizabethRenter.