See, in life insurance, a unit is usually considered to be a $1,000 of coverage.  So, you may get charged $5 per unit purchased.  This is known as the rate.  The rate for a 25-year-old male may be $1 per unit ($1,000 of coverage purchased), and the rate for a 50-year-old may be $5 per unit.  So, an applicant would lie about their age and say they are younger than they actually are to get a lower rate and, in turn, premium.

How does the misstatement of age protect the insurance company?

As you learned above, an applicant would lie about their age when applying for life insurance because the older you are, the more expensive life insurance is.  Why?  Life insurance pays out when you die.  The older you are, the closer you are to death, and the higher the risk is for the insurer to cover you. Therefore, the higher the cost.

The misstatement of age provision allows the insurer to modify what they pay out in a death benefit if it was found that the insured lied about their age when they purchased the policy.

When will the misstatement of age provision apply?

This clause applies for the length of the policy period.  When will an insurer find out if an applicant lied about their age when purchasing a policy?  When the applicant dies.  To collect on life insurance, the policy beneficiary must submit proof of loss to the insurer.  What’s considered proof of loss?  A death certificate.  Once the insurer obtains the death certificate, they can verify the age of the insured.

How does the misstatement of age clause allow the insurer to modify the death benefit?

You must know this for the insurance licensing exam.  What will happen if an applicant lies about their age when they buy life insurance and later die?  The insurer WILL pay the claim.  The policy is NOT voided.  Additionally, there will be no refund of premium or additional premium charged.  Remember, the insured is dead. They can’t pay any more or receive a premium refund.

Misstatement of age allows the insurer to adjust the death benefit up or down based on what the premium the insured was paying would have bought them had they told the truth originally.  Think of it this way.  The insurance company goes back to day one, removes the untrue age, and inserts the correct age.  Based on that age, how much coverage would the individual have had?

Does the misstatement of age clause cause the death benefit to go up or down?

That depends on whether the applicant lied and said they were younger or older than they actually were.  Wait a minute, why would you lie and say you are older than you actually are when buying life insurance?  You wouldn’t.  But, if you did, it would cause your death benefit to go up when you died, as you were paying more than you should have.

In reality, insurers created the misstatement of age clause to reduce death benefit payouts should it be found that an insured lied about their age, stating they were younger than they actually were when they bought the policy.

Is there such a thing as a misstatement of gender clause?

Yes.  It is usually lumped together with the misstatement of age provision in a misstatement of age or gender clause.  It allows the insurer to modify the benefit payable if the applicant were to misstate their gender when applying for life insurance.

What will an insurance licensing exam question about misstatement of age look like on the insurance test?

Kind of like this:

Which of the following is true about the misstatement of age provision?

A.  It allows the insurer to change the premium

B.  It allows the insurer to contest a claim during the first two years

C.  It allows the insurer to adjust benefits

D.  It allows the insurer to void the contract

Answer:  C

Explanation:  A life insurance claim may not be contested for misstatement of age. However, if the insured were to understate their age to obtain a lower premium, at their death, the insurer will adjust their benefits according to what the incorrect premium would have purchased at their correct age. The misstatement of age clause applies indefinitely.

What else can help me prepare to pass my insurance licensing exam on my first attempt?

If you need any help preparing to pass an insurance licensing exam, we have some excellent courses which are primarily video-based.  Check out our available courses now:

Insurance Licensing Exam Prep Video Training Courses

Other tips to help you pass your insurance licensing exam on your first attempt:

Insurance Exam Test Taking Tips

Also, check out our definition and question of the day videos on our YouTube channel:

PassMasters Insurance Exam Prep YouTube Channel