Life Insurance Fraud

According to an FBI estimate, the total cost of insurance fraud in the United States exceeds $40 billion per year. Policyholders can commit fraud with their auto insurance, home insurance, life insurance, and other policies. When parties involved in a life insurance policy deceive the insurance provider for personal gain, this is referred to as life insurance fraud. Life insurance fraud commonly involves providing false information on an application in order to obtain coverage and potentially lower rates, tampering with another person's policy, or even faking death in order to collect policy benefits. Insurance fraud can also be committed by an insurance agent misappropriating money paid on a policy or selling a customer a bogus policy with no real coverage.

It is critical to understand life insurance fraud and its consequences, as committing fraud may result in your insurance provider canceling your coverage. In more serious cases, offenders may face large fines or even criminal charges, which could result in prison time. The insurance editorial team at StrongInsurance has put together a list of common cases of insurance fraud.

What is life insurance fraud?

Life insurance fraud occurs when an individual or group deceives an insurance company in order to profit financially. Common examples of life insurance fraud include lying on an application, such as withholding vital medical information, or tampering with someone else's insurance policy. Untrustworthy insurance agents, organized crime groups, and dishonest individuals are all examples of fraudsters.

Types of life insurance fraud

There are numerous types of life insurance fraud. In some cases, the party committing life insurance fraud is the insurance agent, not the policyholder. Examples of common life insurance fraud include:

• Faked deaths: In these cases, people attempt to collect insurance on someone who is still alive or never existed.
• Pocketed premiums: Untrustworthy insurance agents may pocket your checks instead of paying your premium. One red flag is if your insurance agent asks you to make your check out to them personally rather than the insurance company. To cover their tracks, the agent may also send you unexplained cancellation notices or provide you with forged policy documents.
• Upgrade churning: Churning occurs when an insurance agent convinces you to purchase an additional policy to earn a commission or extra premium payments, despite you being satisfied with your current coverage.
• Being fraudulent on your application: In this type of fraud, a person enters incorrect information on an application. Sometimes the medical exam will reveal the error, such as if you genuinely forgot or were unaware that you had high cholesterol. Such things occur, sometimes inadvertently, and are referred to as "misrepresentation." Some errors may not affect the outcome of your application, such as if your weight is off by a few pounds, but others may result in a higher premium or disqualification from coverage. If you purposefully misinformed or the extent of your misinformation is deemed significant, you may be denied coverage, have your coverage terminated, or have your death benefits withheld. Furthermore, insurance companies may notify the Medical Information Bureau (MIB) about the life insurance application, which means that other companies may be able to see that you've misinformed on previous applications, preventing you from receiving coverage from other insurers.
• Forgery: Forgery occurs when someone with access to an insurance policy changes information without the policyholder's permission. The most common type of forgery is changing the beneficiary's name. The policyholder is the only person who has the authority to change that information.
• Fake policies: Some people may pose as insurance agents and sell fake policies, as well as provide you with fake documents and bills. They may claim to work for a major life insurer, but they want you to pay premiums in advance and directly to them. You can avoid this by only working with licensed agents in established agencies or with a life insurance carrier directly. You can look up an agent's operating license number on the website of your state's licensing or department of insurance.

While these are some of the most common types of life insurance fraud, keep in mind that new forms of fraud may emerge.

Life insurance fraud and faked deaths

Numerous faked-death insurance frauds arose as a result of the September 11, 2001 terrorist attacks on the United States, as insurance claims were filed on behalf of World Trade Center "victims" who were either fictitious or alive (because they were nowhere near Ground Zero at the time of the tragedy).

According to Ed Webster, owner of Orion Investigations in New York, cases involving faked deaths are relatively uncommon because the schemes are difficult to pull off.

Insurance fraudsters frequently fail to realize that insurance companies collaborate closely with investigators, private detectives, and other fraud professionals who are trained to detect insurance fraud. Claims management employees are trained to analyze claim issues and other inconsistencies.

Life insurance fraud involving forgery

According to Joshua Tison, supervisory special agent with the Pennsylvania Office of Attorney General's insurance fraud section, the majority of insurance fraud is committed through forgeries. Tison defines forgery as "when someone other than the policyholder takes control of the insurance policy and changes the beneficiary through "nefarious means."

Authorities in Pennsylvania accused a funeral director of changing a customer's life insurance policy to make the funeral home the policyholder and beneficiary. The customer informed officers that she had not authorized any changes.

Agents implicated in some fraud schemes

Sometimes the fraudsters are insiders in the insurance industry. Policyholders' premiums can be diverted, or customers can be directed to more expensive policies that do not meet their needs. The fraud can be even more elaborate in some cases.

A former life insurance company employee in Minnesota pleaded guilty to stealing more than $1.6 million from her employer by issuing bogus refund checks to both actual and phony customers. According to federal prosecutors, a friend assisted in the scheme by cashing more than $1.1 million in checks. According to reports, the ex-employee was sentenced to 35 months in prison, while the friend received 27 months.

Consequences of insurance fraud

Insurance fraud can result in a variety of penalties. The severity of these can vary depending on the level of fraud committed. Possible consequences include:

• Application rejection: If you lie on your insurance policy application in order to get a lower price (or for any other reason), the insurance company may refuse to write your coverage. Deception can be as simple as lying about your weight or as serious as failing to disclose a serious medical condition.
• Price increase: If you provide misleading information on your insurance application, such as a false bodyweight, your insurer may raise your premium. As a result, attempting to save money by providing false information can easily backfire and end up costing you much more in the long run.
• Canceled claims: If your insurer discovers that you provided false health information on your application and you die during the policy's contestability period, your insurer may decide not to pay your policy's death benefits to your beneficiaries.
• Policy cancellation: Your life insurance policy may be canceled if you provided false health information or failed to disclose certain health conditions during the contestability period. A canceled policy may also make getting life insurance from a different provider more difficult in the future.
• Prosecution: Smaller instances of fraud, such as lying on your application, are less likely to result in prosecution. However, if you commit fraud or forgery on purpose, you could end up in court, facing fines or significant jail time.

How to prevent life insurance fraud

Because life insurance fraud has serious consequences, you should avoid purposefully lying or attempting to deceive the insurer during the application process. Furthermore, you will most likely want to take precautions to avoid becoming a victim of fraud. To begin, you may want to consider the following steps when shopping for insurance:

• Fill out any life insurance application slowly. You may believe that minor errors will go unnoticed. However, even knowingly changing your weight on your application can cause your insurer to be concerned.
• Collaborate with a licensed insurance agent. Your insurance agent should be licensed in your state and for the product you are purchasing. If you have any doubts about your insurance agent's credentials, you can call their employer's toll-free phone number to confirm that the agent works for the company, or you can check with your state's insurance department. Verifying the agent's credentials and working with one of StrongInsurance top-rated life insurance companies may help you avoid purchasing a fraudulent policy.
• Read your policy from beginning to end. Do not sign anything unless you fully understand the terms of the policy. If you are unsure or have any questions, contact your insurance agent or financial advisor.
• Always make checks payable to the insurance provider, not the insurance agent. Criminals posing as insurance agents may cash a check made out to them. Paying in cash is also risky because it cannot be tracked and may make misappropriation of funds much easier for a fraudster.

Frequently asked questions

How do I report insurance fraud?

If you suspect someone of insurance fraud, contact your state's Division of Consumer Fraud, your insurer's Special Investigations Unit, or the National Insurance Crime Bureau hotline at 800-835-6422.

Is there a reward for reporting insurance fraud?

According to the FBI, if you report insurance fraud, you could be rewarded. However, rewards may differ depending on state and local laws.

Are there consequences for making a mistake on my application?

It is your responsibility to ensure that all of the information on your insurance application is correct. Generally, applications include a fraud disclaimer that requires you to sign the form stating that the information is correct to the best of your knowledge. If your insurer discovers that any of the information you provided is incorrect, the company may raise your premium, cancel your policy, or even sue you for fraud or work with state authorities to file criminal charges against you if your misinformation was intended to deceive the insurer.

How can I find the best life insurance company for me?

The best life insurance company will differ depending on the features you require. If you want the cheapest coverage possible, you should compare life insurance quotes from the top-rated life insurance companies in your area. When shopping for insurance, the Insurance Information Institute (Triple-I) recommends getting at least three quotes. If you are dissatisfied with your current premium or believe that a different type of policy would be a better fit for your needs, you should think about switching life insurance providers.

How much life insurance do I need?

If you've decided to buy life insurance, the next logical step is to figure out how much coverage you'll need. To make a decision, consult with a licensed insurance agent and use an online life insurance calculator.

Which life insurance company is the most reputable?

Several life insurance companies have excellent reputations. If you're not sure which life insurance providers to contact first, consult a list of the largest life insurance companies. The Triple-I suggests that you look for financially stable companies that will pay out death benefits to your beneficiaries when the time comes.