Well if the defect did not significantly increase the likelihood of death I am sure they would (or if it only slightly increased the likelihood of death they would just charge more).
Also I was under the impression that the policies on babies often don't include much in the way of real medical checks, but regardless people lie about that stuff all the time (fyi you can lie through your teeth and get a policy, if you die within 2 years they will void it over the tiniest lie BUT if you survive 2 years they have to pay out no matter how much you lied, the parents may not have been aware of the 2 year thing though).