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

When a misrepresentation on a life insurance policy application is discovered, the insurance company has specific rules governing how they can respond, particularly within the context of the contestable period. The contestable period is typically the first two years after the policy has been issued, during which the insurer has the right to investigate and challenge the validity of the application.

If a misrepresentation is discovered during this time, the insurer can void the policy because they argue that the misrepresentation affects their underwriting decision, potentially leading them to issue a policy under different terms or even to deny coverage altogether. This is in accordance with the principles of insurance where accurate information is crucial for the insurer to determine risk and calculate premiums.

Once the contestable period has passed, however, the insurer's ability to cancel or void the policy due to misrepresentation is significantly restricted. To sustain fairness in the insurance market and protect policyholders, policies are generally honored even if some inaccuracies in the application are later discovered.

The other choices do not align with the insurance principles governing misrepresentation:

• Canceling the policy immediately regardless of the time does not take into account that after the contestable period the policy is considered binding unless the misrepresentation is deemed to be fraudulent.

• Processing the claim without issues does