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The total cost of insurance fraud in the U.S. each year exceeds $40 billion, according to an FBI estimate. Life insurance fraud occurs when parties relevant to a life insurance policy deceive the insurance provider for personal gain. This could take place in a variety of ways, including providing misinformation on an application to obtain coverage and potentially lower rates, tampering with another person’s policy or even faking death to collect policy benefits. Being aware of what constitutes life insurance fraud and the consequences is important, as committing fraud could result in your coverage being canceled. Below, Bankrate’s insurance editorial team outlines what constitutes fraud, common cases of insurance fraud and what to look out for.
What is life insurance fraud?
Life insurance fraud occurs when an individual or group is dishonest with an insurance company to benefit financially. Common instances of life insurance fraud may include lying on an application, such as withholding important medical history, or tampering with someone else’s insurance policy. Fraudsters may also include unscrupulous insurance agents, organized crime groups or dishonest individuals.
It’s also important to note that life insurance policies typically include what’s known as a contestability period. Should the policyholder due during this period, which lasts two years, insurance companies have the ability to investigate the death and contest paying out the death benefit depending on the results of the investigation.
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.
- Pocketed premiums: Dishonest insurance agents may pocket your checks rather than pay your premium. This is known as premium diversion, according to the FBI. Warning 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 or provide you with fake 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: This 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 for coverage. If you have purposefully misinformed or the extent of your misinformation is considered significant, you may be turned down for a policy, coverage could be terminated or death benefits will be withheld. Insurance companies may use the Medical Information Bureau (MIB) to identify omissions in medical information. MIB maintains coded data about medical conditions and risk factors to alert insurers of potential application omissions or errors. Any alerts from the MIB may prompt further investigation by the insurer but cannot alone justify an adverse underwriting decision.
- Forgery: Forgery occurs when someone who is able to access a certain insurance policy changes information without authorization from the policyholder. Changing the name of the beneficiary is the most common form of forgery. The only person allowed to change that information is the policyholder.
- Fake policies: Some individuals may claim to be insurance agents and sell fake policies and even provide you with fake documents and fake bills. They may claim to work for a major life 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 agents for their operating license number and check it on your state’s licensing or department of insurance website.
While these are some common forms of life insurance fraud, keep in mind that new fraudulent activity may emerge.
Life insurance fraud and faked deaths
Numerous faked-death insurance frauds were spun out of the Sept. 11, 2001 terrorist attacks on the U.S., as 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 when the tragedy occurred).
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 policyholder 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 don’t 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 a variety of consequences for insurance fraud. These can vary in severity depending on the level of fraud committed. Consequences may include:
- Application rejection: If you misinform on your insurance policy application to achieve lower prices (or for any other reason), the insurance provider could deny writing your coverage. Examples of deception could be as small as misstating your weight or as large as failing to disclose a serious medical condition.
- Price increase: If you include deceptive information on your insurance application — for instance, providing a false bodyweight — your insurer may increase your premium. For this reason, attempting to save money by providing false information can easily backfire and cost 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 within the policy’s contestability period, your insurer could decide not to pay out your policy’s death benefits to your beneficiaries.
- Policy cancellation: If you provided false health information or neglected to disclose certain health conditions, your life insurance policy could be canceled during the contestability period. A canceled policy could also make it more difficult to get life insurance from a different provider in the future.
- Denial of death benefits: If the policyholder passes away during the two year contestability period, an insurer may adjust or altogether deny payment of death benefits if they find fraud or deception has taken place.
- Prosecution: Smaller instances of fraud such as lying on your application are less likely to be prosecuted. However, if you intentionally commit fraud or forgery, you could end up in court, facing fines or substantial 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 following these steps when shopping for coverage:
- Take your time filling out any life insurance application. You may assume small mistakes will go unnoticed. However, even knowingly changing your weight on your application can raise concerns with your insurer.
- 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 or check with the state’s department of insurance. Verifying the agent’s credentials and working with one of the best life insurance companies, as rated by Bankrate, may help you avoid purchasing a fraudulent policy.
- Read your entire policy thoroughly. Do not sign anything unless you clearly understand the policy terms. Talk to your insurance agent or financial adviser if you are confused or have any questions.
- Always make checks payable to the insurance provider, 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 much easier for a fraudster.
Frequently asked questions
If you suspect someone of insurance fraud, you can report it to your state’s Division of Consumer Fraud, your insurer’s Special Investigations Unit that handles fraud incidents, or call the National Insurance Crime Bureau hotline at 800-835-6422.
According to the FBI, you may receive a reward if you report insurance fraud. However, rewards may vary according to state and local regulations.
You are responsible for ensuring that all the information included 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 or work with state authorities to file criminal charges against you if your misinformation was intentional in an attempt to deceive the insurer. In addition, if death of the policyholder occurs during the two-year contestability period, the insurance company can investigate for fraud and deny or reduce the death benefit.
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. The Insurance Information Institute (Triple-I) recommends you get a minimum of three quotes when shopping for coverage. 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 providers.
If you have decided to purchase life insurance, the next logical step is determining 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.