Dear Dr. Don,
My brother passed away three months ago. Now his widow and daughter are saying someone took out a life insurance policy on him 30 days before he died. His doctors had only given him five weeks to live. They say Social Security won’t pay his medical bills because of this policy. They also say the insurance company won’t tell his wife who the beneficiary is or was. The insurance company has supposedly already paid the claim.
Why would any insurance company insure someone given only weeks to live? To me, if this is true, it would be fraud. Wouldn’t the wife have the right to know? Why wouldn’t the insurance company tell them who benefited?
— Faye Fraudulent
There are three distinct parties to a life insurance policy: the owner of the policy, the insured and the policy beneficiary. Stranger-owned life insurance, or STOLI, is a current issue in the industry. At its heart, the issue is whether the owner of the policy has an insurable interest in the life of the insured. That’s typically a requirement, at least when the policy is first issued.
If your brother took the policy out on his own life, there would be no insurable interest issues. However, if the policy was taken out by some other party on the life of the deceased, there would have been a requirement that the person to be insured give consent to the policy purchase. There is no requirement that the insurer share information with anyone other than the policy owner or the insured.
If the death benefit was actually paid, the insurer would have paid it to the policy beneficiary. If the policy was taken out by someone other than the insured, it is highly likely the beneficiary was the person who bought the policy.
Social Security doesn’t pay medical benefits. The only type of social safety net concern that might be relevant in this case would be if the individual was on welfare. In such cases, certain assets might disqualify the person from receiving welfare benefits — but the policy would have to be owned by the deceased to disqualify him for welfare benefits.
If the information you’ve provided is correct, there is a strong possibility of fraud. The insurer and the state insurance commissioner would be interested in any information that would identify fraud. The insurer would probably start legal action to recover the death benefit if fraud can be established. Information about the medical condition of the deceased may be sufficient to establish fraud.
It’s not clear that an insurance company has any obligation to tell persons who were not parties to a policy about anything dealing with that policy. There are certain privacy rules that need to be maintained.
I would agree, however, that there very easily could be some type of fraud if someone got a life insurance policy at that point in time. If so, this might be a matter to report to the state insurance department.
Some states are very good about investigating insurance fraud. The National Association of Insurance Commissioners, or NAIC, maintains a listing for all states. It’s available on their website.
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Note: I’d like to thank Edward Graves, associate professor of insurance and the Charles J. Zimmerman chair in life insurance education at The American College in Bryn Mawr, Pa.; and Burton T. Beam Jr., a retired insurance professor who taught at The American College, for their help and insights in framing this reply.
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