If you've been doing your research on life insurance, you undoubtedly know that life insurance companies use a number of different factors to determine eligibility and monthly premium payments. Age, gender and health status are the most common criteria to classify applicants in rating categories. Those who are younger and healthier are more likely to receive low cost life insurance quotes.

Knowing how much your medical history can impact your pocketbook leads some to consider "forgetting" certain facts when applying for life insurance. After all, how will the insurance company find out about that minor heart attack you had five years ago? Or the brother who was diagnosed with cancer at age 45?

Make no mistake, insurers are not as naive as you might think.

Lying on life insurance applications

There are no hard and fast statistics regarding lying on life insurance applications. While no agency tracks who lies and about what, anecdotal information identifies some trends in the fibs people tell. According to Insure.com, people lie to cover up all sorts of behaviors, including these five:

  1. Tobacco, alcohol and drug use
  2. History of depression
  3. Family medical history of cancer
  4. Multiple moving violations
  5. High-risk activities and travel plans

In addition, some people lie about their income to make them eligible for term or whole life insurance policies with larger death benefits.

How life insurance companies catch liars

Life insurance companies make their money by minimizing risk. They want to insure people who are likely to live a long time - paying premiums without ever claiming the death benefit. So it makes sense that these businesses take precautions to ensure that your application information is accurate and complete.

How do life insurance companies check to make sure you are being honest? They can use a number of resources, including these five:

  1. Physical exams
  2. Doctor reports
  3. Motor vehicle records
  4. Credit reports
  5. Autopsies in the event of death

However, their "secret weapon" might be what was previously called the Medical Information Bureau (MIB). This group, comprised of member life insurance companies, offers a way for insurers to confidentially share information and potential red flags about applicants. The MIB reports that it saves member companies $1 billion annually by allowing them to avoid fraudulent life insurance applications and early claims.

What happens when you are caught lying

If a life insurance company discovers a lie on your application before they extend you a policy, they may simply choose to decline you coverage or they may change your rating to a class with higher premiums.

After you have the policy, life insurance companies have two years, in most cases, to determine whether you have misrepresented yourself in the application, according to MIB. For example, if you should die within this two-year period, the life insurance company can conduct an investigation. If it should discover that you had a pre-existing condition you did not reveal, the company can then deny your family's claim or reduce the death benefit.

You might think that once you make it out of this two-year period, you are off scot free. However, a life insurance company can still dispute the validity of a term or whole life insurance policy. In October, a federal court ruled that "egregious facts" may allow a company to rescind a policy even after the incontestability period has ended. At that point, it becomes the company's responsibility to prove that the applicant intended fraud and didn't simply make a mistake or innocent omission on their application.

In the end, it is better not to risk your family's financial future. When completing your application for affordable life insurance, the best advice you can get is to tell the truth, the whole truth and nothing but the truth.