What Is Life Insurance Fraud? How Can I Avoid It?
What is life insurance fraud?
Life insurance fraud happens whenever any of the parties involved with a policy do something to benefit from the policy in a way that was never intended by the insurer.
When all works right, it’s simple. If you have a term life insurance policy for $100,000 and you pass away, your beneficiary will receive a payment for that amount. Sometimes, however, dishonest people take steps to cheat the insurance company out of money. There are frequently stories in newspapers and magazines about life insurance fraud cases, and some of the more spectacular ones get made into movies or books.
More commonly, though, life insurance fraud happens when someone tells lie on an application, or an agent diverts money being paid into a policy. These situations aren’t glamorous, and they’re certainly not legal, but they are not uncommon.
Types of life insurance frauds
Let’s take a look at what are the different types of insurance frauds. Life insurance fraud can include:
- Faked deaths. In these cases, people try to collect the insurance of a person who’s still alive or in some cases never even existed.
- “Double Indemnity”-style plots. In the iconic 1940s movie, Barbara Stanwyck and insurance man Fred MacMurray plot to kill her husband for a big insurance payout. Today, a warning sign might be if a spouse or other family member suddenly asks a person to buy or increase life insurance coverage.
- Pocketed premiums. Perpetrated by dishonest agents, this type of fraud involves you getting unexplained cancellation notices after your insurance agent tells you to make out the check for your new life insurance policy to him, not to the insurance company. Those checks are being diverted and pocketed by the agent.
- Upgrade “churning.” Your agent convinces you to upgrade to a “better” (and more expensive) policy. It offers nothing more than the first one did, but the agent collects a nice commission.
- Lying on your application. This common fraud involves a person adding incorrect information to an application. Sometimes, the medical exam will highlight the error — say, if your weight is off by a few pounds in your initial app. Things like that happen, sometimes inadvertently. But your potential insurer will probably respond by offering a slightly less beneficial premium rate to you. If you have lied purposefully, you may be turned down for a policy. In the end, the lie could cost you more than if you’d been honest from the start.
- Forgery. Forgery occurs when someone who is able to access the policy changes information — most commonly, the name of the beneficiary. The only person allowed to do that is the policy owner.
- Fake policies. Some unscrupulous individuals will claim to be insurance agents and sell fake policies. They may claim to work for a national insurer but want you to pay premiums upfront to them directly. One tip is to only work with licensed agents. You can ask for the license number and check it on your state’s licensing or insurance website.
- Premeditated Murder: Another very dramatic form of insurance fraud is murder by a beneficiary for the purpose of cashing in on an insurance policy. Again, this is not common, but it does happen, and the perpetrators are usually caught very quickly. Many people dramatically underestimate how difficult it is to actually kill someone, let alone make it look unintentional. However, many people are so blinded by the promise of a huge insurance payout that they don’t thoroughly consider the consequences.
While these are the most common, keep in mind that new frauds may emerge as people find other ways to try to scam their way to more money.
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How to Avoid Insurance Fraud
There are steps that you can take to avoid getting wrapped up in insurance fraud. Not only could you be a target for fraudulent insurance agents, but you also could end up being a target for other people looking to take advance of honest policyholders. As mentioned previously, you should always be diligent about checking the legitimacy of your insurance agent’s license. It’s also important to thoroughly read any policy before signing it, and be sure to ask questions and get detailed answers if there are any concerns.
It’s also important to always have a copy of your insurance policy, just in case. Do not ever hand over your insurance policy to anyone else blindly. There might be situations where a beneficiary needs a copy of the policy, but you should always investigate why and make sure the inquiry is legitimate before providing it. Finally, do not ever sign a policy that has blanks on it that someone else could fill in later. Many fraudulent agents will tell you that you don’t need to fill in these spaces, only to fill them in themselves to get a payout.
When shopping for life insurance, work with a bonafide agent whose license is up to date with your state’s licensing bureau. If you’re unsure, call the main company’s toll-free number to ensure that this person works for the provider.
Read all the fine print in your policy documents, no matter how boring that might be. Don’t sign anything unless you’re sure you understand it. Never give money directly made out to an agent — all checks should be made out to the company itself.
If you have elderly relatives or friends who are applying for insurance, make sure they aren’t being fleeced by an unscrupulous operator. Insurance scams that target the elderly are, sadly, common. Your assistance could be the only thing that stands between a huckster and your grandmother’s savings account.
If you’re tempted to commit one of the higher forms of insurance fraud — like faking your death — just don’t. There are highly-trained individuals who will be checking the claim over carefully, and you risk losing your freedom as well as your financial security.
Life insurance fraud can result in serious consequences. Do everything you can to avoid it so you get what you want from your insurance policy.