Tennessee Insurance Practice Exam

What may an insurance company do when a misrepresentation on a life insurance policy application is discovered?

1. Enhance the policy benefits

2. Void the policy during the Contestable period if proven material

3. Issue a new policy with adjusted terms

4. Increase premium rates

The correct answer is: Void the policy during the Contestable period if proven material

When a misrepresentation is discovered on a life insurance policy application, the insurance company has certain rights and options, particularly during the Contestable period, which is typically the first two years after the policy is issued. During this time, the insurer can investigate claims more rigorously and has the ability to contest the validity of the policy based on misrepresentations. If it is determined that the misrepresentation was material—that is, it influenced the underwriting decision or the terms of the policy—the insurance company can indeed void the policy. This means that they would cancel the coverage and return any premiums paid, as if the policy was never in effect. This is a crucial aspect as it underscores the applicant's responsibility to provide accurate information when applying for insurance, as significant discrepancies can lead directly to the loss of coverage. Other options, such as enhancing policy benefits, issuing a new policy with adjusted terms, or increasing premium rates, do not apply to the situation of addressing misrepresentations. Those options do not reflect the typical consequences an insurer would impose for inaccuracies that affect risk assessment and underwriting decisions.