What is life insurance fraud?

Buying a life insurance policy is one of the most responsible decisions for yourself and your family. Doing so ensures that your family doesn’t have to cover your funeral and burial expenses.

Sometimes, criminals can take advantage of life insurance companies or vice versa. This is called life insurance fraud, and this guide will explain everything you need to know to about what life insurance fraud is and how to avoid being a victim of this crime. 

What is life insurance?

To put it simply, a life insurance policy is a contract between an insurance company and a customer. This contract dictates that the life insurance company will pay out a large sum of money to one or more beneficiaries when the policyholder dies. 

This large sum of money is traditionally called the death benefit — it’s the total value of your life insurance policy, including any cash-value investments. The money you pay every month to the life insurance company is called the premium. 

To best demonstrate how life insurance works, let’s use an example. A woman named Sarah buys life insurance through their employer. The life insurance policy is worth $500,000, and Sarah is required to pay $35 a month to maintain the policy. 

There are multiple different types of life insurance, but the two main types of coverage are term vs. permanent life insurance: 

• Term life insurance: Policy coverage lasts for a specific period of time, usually in increments of 15, 25, and 30 years. Compare the different types of term life insurance.
• Permanent life insurance: Policy coverage applies for your entire life and includes cash value that can be invested. 

Term life insurance is easier to buy because it eventually expires. Customers typically don’t even have to submit to a medical exam. Learn how to get term life insurance quotes.

Conversely, whole life insurance is a greater investment for you and the life insurance company since it agrees to coverage for your entire lifetime. Find whole life insurance companies here.

When applying for a permanent life insurance policy, you will have to take a medical exam. As a result, your life insurance premiums can fluctuate depending on the results or if you have any pre-existing conditions.

This is usually how buying a life insurance policy works. As you will find out, life insurance fraud is an attempt to game the system and steal thousands of dollars in the process. Learn more about no-medical-exam life insurance.

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What is life insurance fraud?

Life insurance fraud is the attempt or a successful act of theft from an insurance company or customer. Fraud happens when the perpetrator deceives the insurance company for personal gain. 

It is a very serious crime in the United States. According to the FBI, life insurance fraud costs victims more than $40 billion every year.

There are many ways a criminal can commit life insurance fraud. A few common instances include:

• Providing false or misleading information on a life insurance application in order to receive lower rates
• Tampering with another customer’s policy
• Faking one’s death to collect the death benefit 

Insurance agents can also commit life insurance fraud by selling fake policies that provide no coverage or misappropriating the money you are paying on a legitimate policy. 

Overall, life insurance fraud can take on many forms. If you’re buying a life insurance policy, it’s essential to be mindful of this crime so you can avoid being a victim. 

There are several different types of life insurance fraud. Below, we’ll break down each major type of life insurance fraud you might encounter.

Faked Deaths

As silly as it sounds, there are several recorded instances where people have faked their deaths to collect the death benefit for their policies. In some cases, fraudsters will even attempt to collect the death benefit for a person who never existed.

Nonetheless, life insurance companies are privy to working with private investigators and the police to truly find out if beneficiaries are real people and uncover the truth about reported deaths. 

Because of this, life insurance companies are rarely fooled by fake deaths. Though, you shouldn’t be surprised if one day you find out that a customer committed fraud via fake death on the news. 

Pocketed Premiums

If the fraudster happens to be your life insurance agent, they may try to pocket the money you owe on your policy. Usually, they’ll request that you write a check out to them in the amount of your monthly or annual premium.

They may even send over fake documentation or cancellation notices to cover their tracks or intimidate you. You can prevent this situation by never sending personal payments to an insurance agent, no matter how authentic they appear. 

Unethical Upgrades

One of the most notorious and unethical forms of life insurance fraud happens when an agent coerces you to upgrade your existing life insurance policy to gain from any commissions.

If you’re already satisfied with your life insurance policy and are getting harassed by your life insurance agent, contact your company immediately to file a complaint. 

Read more: How to File a Complaint Against a Life Insurance Company

Fraudulent Applications

What happens if you lie on your life insurance application? For example, you may write that you don’t have high cholesterol when you really do. A simple medical exam can uncover these errors, as life insurance companies label these errors as “misrepresentation.”

It’s important to point out that making a small error on your life insurance application isn’t grounds for fraud. In addition, most small mistakes won’t warrant a change in your life insurance rates or coverage.

However, if you intentionally lied on your life insurance application to get a better price or hide a pre-existing condition, your life insurance company will cancel the policy and withhold any death benefits. 

In addition, your life insurance company will report the incident to Medical Information Bureau (MIB), meaning other life insurance companies will see the notice and deny you coverage in the future. Here’s how to access the Medical Information Bureau (MIB).

Forgery

Forgery happens when a person with unauthorized access takes control of someone’s life insurance policy to make changes. 

Usually, the forger will change the name of the beneficiary. The only person allowed to change the beneficiary information is the policy owner. Unfortunately, these changes can go unnoticed for years, which is why it’s essential to constantly monitor your policy. 

Read more: Can you change your life insurance beneficiary?

If you’re not vigilant, a malicious actor can gain access to your policy and make unauthorized changes. Luckily, reputable life insurance companies offer security measures to prevent forgery. 

For example, you can set up two-factor authentication to require anyone logging into your online account to verify their identity before accessing any sensitive information. Another security measure is account updates, notifying you when changes have been made to your policy. 

Overall, it’s impossible to know who exactly can have access to your account, so taking advantage of these security features is the best way to safeguard your account from any malicious people. 

Fake Policies

Some people claim to be life insurance agents to fool people into paying them directly for coverage. Savvy criminals will go through any means to present themselves as authentic agents. 

The best way to avoid a fake policy is to closely check the documents you receive from any life insurance agent or company. Look for official letterheads and logos. You should also check social media, including LinkedIn and Facebook, to confirm your agent’s identity. 

Industry Insiders

There are several situations where life insurance agents can take advantage of their customers and defraud them. Sometimes, they’ll convince customers to write personal checks to them. Other times, scammers can steal their customers’ information and make any changes they want to policies.

For example, in Minnesota, a life insurance company employee pled guilty to stealing nearly $2 million from her employer. With the assistance of a friend, they cashed in more than $1 million in bogus refund checks. 

Consequences of Life Insurance Fraud

Life insurance fraud is punished very severely in the United States. Depending on the severity of the crime committed, punishment can range from restitution to jail time. 

Below are some of the consequences to expect for those who commit life insurance fraud:

• Rejected application: If you knowingly include any misleading or false information on your application, the company can deny your application. Examples of misleading information include lying about a major health condition or grossly misstating your weight. 
• Premium increase: If you lie on your life insurance application, the company could approve your application with a higher premium. This would defeat the purpose of lying on your application, especially if you tried to get lower rates in the first place.
• Canceled claim: If your life insurance company discovers that you lied on your application after your death, they can decide not to award your death benefits during the contestability period. 
• Policy cancellation: If the life insurance company finds out you provided misleading information on your application, they can cancel your policy altogether. A canceled policy could make it more difficult to receive coverage in the future. 

Smaller cases of life insurance fraud, like lying on your application, are rarely prosecuted. However, you could face large fines and jail time if you commit fraud and forgery to cheat customers or companies out of substantial money.

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How to Prevent Life Insurance Fraud

Life insurance fraud carries very stringent penalties. Therefore, you want to be certain your application is accurate before submitting it. Also, it doesn’t hurt to ensure that you are protecting yourself from fraud. 

Here are some convenient ways to protect yourself from life insurance fraud and keep your investment safe:

• Take your time filling out your application. Rushing on a life insurance application often leads to mistakes. Remember, it’s up to the discretion of the life insurance company to determine if you lied if it finds an error. 
• Only work with a licensed life insurance agent. All life insurance agents should have a valid state license. If you’re unsure about an agent, call the company and check their credentials. 
• Read your policy carefully. It’s common to skim over a policy’s underwriting documentation or neglect it completely. However, reading it may allow you to find glaring inconsistencies in your coverage. 
• Only pay the insurance company. Never send life insurance payments to an agent, no matter what they tell you. Your contract is with the life insurance company, not your agent. 

Following all of these tips can help you stay clear of life insurance fraud and make sure your policy is secure. 

Case Studies: Illustrating Life Insurance Fraud and Preventive Measures

Case Study 1: Faked Deaths

John, a policyholder, fakes his own death to collect the death benefit from his life insurance policy. He conspires with a friend who helps him create a fake identity for the beneficiary. However, the life insurance company, working with private investigators and the police, discovers the fraud and exposes the scheme.

Case Study 2: Pocketed Premiums

Sarah, a trusting policyholder, falls victim to her life insurance agent’s fraudulent activities. The agent convinces Sarah to write her monthly premium checks directly to him instead of the insurance company.

He uses fake documentation and cancellation notices to cover his tracks. Sarah realizes the fraud when her policy is canceled due to non-payment, and she reports the agent to the insurance company.

Case Study 3: Unethical Upgrades

Lisa already has a suitable life insurance policy, but her agent coerces her into upgrading her coverage to increase his commissions. Lisa, feeling pressured, agrees to the upgrade but later realizes she was manipulated. She files a complaint with her insurance company and seeks legal action against the agent for his unethical practices.

Case Study 4: Fraudulent Applications

Mike intentionally lies on his life insurance application to secure a lower premium or hide a pre-existing medical condition. He states that he doesn’t have high cholesterol when he actually does.

However, during the mandatory medical exam, his deception is discovered, and the insurance company cancels his policy, withholding any potential death benefits. The incident is reported to the Medical Information Bureau (MIB), affecting Mike’s ability to obtain future life insurance coverage.

Case Study 5: Forgery

An unauthorized person gains access to Sarah’s life insurance policy and changes the beneficiary’s name. The changes go unnoticed for several years until Sarah decides to review her policy.

Fortunately, Sarah’s life insurance company has security measures in place, such as two-factor authentication and account update notifications, which help prevent forgery. Sarah immediately contacts her insurance company to rectify the unauthorized changes.

Case Study 6: Fake Policies

Tom falls victim to a scammer posing as a life insurance agent. The scammer convinces Tom to pay directly for a life insurance policy that turns out to be fake. The scammer goes to great lengths to present themselves as an authentic agent, including using official-looking documents.

Tom, however, notices discrepancies and performs a thorough background check, discovering the scam. He reports the fraud to the authorities and warns others about the fraudulent agent.

Ultimately, life insurance fraud is a serious crime that affects thousands of Americans every year. The good news is that you can avoid being labeled as a fraudster by taking the time to fill out your life insurance application and monitoring your account regularly to catch any unusual changes in your policy.

The most common insurance frauds are forgeries and fake policies, so protect yourself by monitoring your policy and working with life insurance agents you trust.

If you suspect your life insurance agent is committing fraud, reach out to your company directly.

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