Life insurance fraud

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The total cost of insurance fraud exceeds $40 billion each year, according to an FBI estimate. Policyholders can commit fraud with their auto insurance, home insurance, life insurance policies and more. Life insurance fraud occurs when parties relevant to a life insurance policy deceive the insurance provider for personal gain. Common instances of life insurance fraud include lying on an application for cheaper rates, tampering with another person’s policy or even faking a death. An insurance agent can also commit insurance fraud by misappropriating money being paid on a policy.

Being aware of life insurance fraud and its consequences is important, as committing fraud could result in your insurance provider canceling your coverage. In more serious cases, offenders may have to pay large fines or even be jailed. Below, Bankrate’s insurance editorial team outlines common cases of insurance fraud.

What is life insurance fraud?

Life insurance fraud occurs when an individual or group is dishonest with an insurance company for the purpose of benefiting financially. Common instances of life insurance fraud may include lying on an application to get lower rates or tampering with someone else’s insurance policy. Fraudsters may include insurance agents, organized crime groups or individuals.

Types of life insurance fraud

Life insurance fraud can take many forms. In some cases, the insurance agent — not the policyholder — is the party committing life insurance fraud. Common instances of life insurance fraud include:

  • Faked deaths: In these cases, people try to collect the insurance of a person who is still alive or never existed.
  • Beneficiaries planning to kill a policyholder: While rare, some beneficiaries may murder a policyholder in order to benefit from their death benefit payout.
  • Pocketed premiums: Dishonest insurance agents may pocket your checks rather than paying your premium. Signs may include your insurance agent asking you to make out your check to them personally rather than the insurance company. The agent may also send you unexplained cancellation notices to cover their tracks.
  • Upgrade churning: Churning occurs when an insurance agent convinces you to purchase a different policy for the purpose of earning a commission or extra premium payments, despite you being satisfied with your current coverage. 
  • Lying on your application: This common type of fraud involves a person including incorrect information on an application. Sometimes, the medical exam will highlight the error — like if you genuinely forgot or didn’t know that you had high cholesterol. Things like that happen, sometimes inadvertently, and are called “misrepresentation.” Some mistakes might not change the outcome of your application, like if your weight was off by a few pounds, but some might result in a higher premium or disqualification. If you have lied purposefully or the extent of your misinformation is big enough, you may be turned down for a policy. Insurance companies may notify the Medical Information Bureau (MIB) about lies on life insurance applications, which means that other companies might be able to see that you’ve lied on prior applications if you apply for coverage in the future.
  • Forgery: Forgery occurs when someone who is able to access a certain insurance policy changes information. Changing the name of the beneficiary is a common form of forgery. The only person allowed to change that information 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 and to them directly. You can avoid this by only working with licensed agents in established agencies or directly with a life insurance carrier. You can ask for their license number and check it on your state’s licensing or insurance website.

While these are some of the most common forms of fraud, keep in mind that new fraudulent activity may emerge as people find other ways to scam their way to more money.

Life insurance fraud and faked deaths

Numerous faked-death insurance frauds were spun out of the Sept. 11, 2001, terrorist attacks, as phony insurance claims were filed on behalf of World Trade Center “victims” who were fictitious or were alive (because they’d been nowhere near Ground Zero).

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

Often, fraudsters fail to realize that insurance companies work closely with investigators, private detectives and other fraud professionals who are trained to spot insurance fraud. Insurance staffers who work in claims management are trained to analyze claim issues and other inconsistencies.

Life insurance fraud involving forgery

Supervisory special agent Joshua Tison, of the insurance fraud section of the Pennsylvania Office of Attorney General, says most insurance fraud is committed through forgeries. Forgery occurs when someone other than the policyholder takes control of the insurance policy and changes the beneficiary through “nefarious means,” Tison explains.

In one example of forgery from Pennsylvania, authorities accused a funeral director of changing a customer’s life insurance policy to make the funeral home the policyowner and beneficiary. The customer told police she hadn’t authorized any changes.

Agents implicated in some fraud schemes

Sometimes, the fraudsters are insurance industry insiders. Policyholders’ premiums can be diverted or customers can be steered into pricier policies that aren’t a good fit for their needs. In some cases, the fraud can be even more elaborate.

In Minnesota, a former life insurance company employee pleaded guilty to stealing more than $1.6 million from her employer by issuing bogus refund checks for actual and phony customers. Federal prosecutors said a friend assisted in the scheme by cashing more than $1.1 million worth of the checks. The ex-employee reportedly was sentenced to 35 months in prison, and the friend got 27 months.

Consequences of insurance fraud

You could face consequences for insurance fraud. Consequences vary in severity depending on the level of fraud committed. Consequences may include:

  • Application rejection: If you lie on your insurance policy application to achieve lower prices (or for any other reason), the insurance provider could deny your coverage. Examples of deception could be as small as misstating your weight or as large as failing to disclose a disease.
  • Price increase: If you include deceptive information on your insurance application — for instance, providing a false body weight — your insurer may increase your premium. For this reason, attempting to save money by providing false information can easily backfire.
  • Canceled claims: If your insurer discovers that you provided false health information and you die within the policy’s contestability period, your insurer could decide not to pay out your policy.
  • Policy cancellation: If you provided false health information or neglected to disclose certain health conditions, your life insurance policy could be canceled. A canceled policy could also make it more difficult to get life insurance from a different provider in the future.
  • Prosecution: Smaller instances of fraud such as lying on your application are less likely to be prosecuted. However, if you commit fraud or forgery you could end up in court facing fines or jail time.

How to prevent life insurance fraud

Since life insurance fraud comes with significant consequences, you will not want to purposefully lie or attempt to deceive the insurer during the application process. In addition, you will likely want to take precautions to protect yourself from being a victim of fraud. To start, you may want to consider taking the following steps:

  • Take your time filling out any life insurance application. You may assume small mistakes will go unnoticed. However, even knowingly changing your weight can raise concern on your application.
  • Work with a licensed insurance agent. Your insurance agent should carry proper and current licensing for your state and the product you are buying. If you are unsure about your insurance agent’s credentials, you can call their employer’s toll-free phone number to verify that the agent works for the company. Verifying the agent’s employment status and working with one of the best life insurance companies may help you avoid purchasing a fraudulent policy.
  • Read your entire policy. Do not sign anything unless you understand the entire policy. Talk to your insurance agent if you are confused.
  • Always make out checks to the company itself, not the insurance agent. Criminals impersonating insurance agents could cash a check you make out to them. Paying cash may also be risky, as it can’t be traced and might make misappropriation of the funds easier.

Frequently asked questions

How do I report insurance fraud?

To report someone that you suspect of insurance fraud, you can call the National Insurance Crime Bureau hotline at 1-800-835-6422.

Is there a reward for reporting insurance fraud?

According to the FBI, you may receive a reward if you report insurance fraud. However, rewards may vary according to state and local regulations.

Are there consequences for making a mistake on my application?

Yes. You are responsible for ensuring that all the information on your insurance application is correct. Generally, applications include a fraud disclaimer which requires you to sign the form stating that, to the best of your knowledge, the information is accurate. If your insurer discovers that any of the information you provided is incorrect, the company could increase your premium, cancel your policy or even sue you for fraud if your misinformation was intentional in an attempt to deceive the insurer.

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

The best life insurance company will vary for everyone based on what features you want. If you are looking for the cheapest coverage you can find, you may want to compare life insurance quotes from the top-rated life insurance companies in your area. If you are unhappy with the premium you are currently paying or if you think a different type of policy may be a better fit for your needs, you may want to consider switching life insurance.

How much life insurance do I need?

If you have decided to purchase life insurance, the next logical step is wondering how much life insurance you’ll need. To decide, it may be helpful to talk with a licensed insurance agent and use an online life insurance calculator.

Which life insurance company is the most reputable?

Dozens of life insurance providers have great reputations. If you aren’t sure which life insurance providers to get quotes from first, you may want to consult a list of the largest life insurance companies.

Written by
Lizzie Nealon
Insurance Writer
Lizzie Nealon is an insurance writer for Bankrate. Her favorite part of the job is making home, auto and life insurance digestible for readers so they can prepare for the future.
Edited by
Insurance Writer & Editor