Well, on the Customs Form, aren't you suppose to be truthful with the description?
Sure you are, but that has little to do with the issue at hand except to show the USPS you shipped something that you are not supposed to ship giving them an EXCUSE to deny your claim and make your life hell.
If you are sending something "illegal" you might not want to advertise that fact (had you investigated before hand you would have known - once again, ignorance of the law is no excuse). Like sending drugs inside a stuffed animal. Would you write "stuffed animal full of drugs" on the customs declaration form or just "stuffed animal?"
Hopefully you will find a way to collect your insurance based on it not even getting there, but remember, you're dealing with the federal government and the fact you told them (by way of the form) that the item was not a permitted item might be a "loophole" for them to not pay you. There might be fine print somewhere saying "insurance is void for non-permitted items whether they reach the destination or get lost en-route." You could always sue them I guess. Good luck fighting the feds.