Life insurance fraud
Life insurance fraud is more than just a financial crime — it’s a significant issue that impacts everyone by driving up premiums and creating financial risks. According to the Coalition Against Insurance Fraud, insurance fraud costs the U.S. around $308.6 billion every year, with life insurance fraud accounting for $74.7 billion of that total. Fraudulent activity can take many forms, from providing false information on a life insurance application to manipulating another person’s policy or even faking a death to claim benefits. These actions can result in canceled coverage, denied claims or even criminal charges. Understanding the common types of life insurance fraud and how to protect yourself is crucial. In this guide, we’ll break down the different forms of life insurance fraud, share real-world examples and provide tips on what to watch out for to avoid falling victim or unintentionally committing fraud yourself.
What is life insurance fraud?
Life insurance fraud isn’t just about a policyholder being dishonest, it can involve multiple players, including beneficiaries, agents or even the insured themselves. Whether it’s someone faking their death to cash in on benefits or an agent doctoring details for a commission, life insurance fraud comes in many forms. Even infamous criminals like H.H. Holmes — dubbed America’s first serial killer — used insurance fraud as part of his grisly schemes in the 1890s. Holmes would take out life insurance policies on victims he intended to kill, collecting payouts after staging their deaths.
To help prevent these kinds of abuses, life insurance policies include safeguards like the requirement for insurable interest. Simply put, the person buying the policy has to demonstrate a legitimate reason to insure the life of the person covered, usually financial dependency or close familial connection. This prevents policies from being issued solely as profit-making tools.
Additionally, most policies have a contestability period of one to two years. During this time, insurers can investigate and even deny claims if they discover misrepresentations or fraudulent activity. After this period ends, the incontestability clause kicks in, offering more protection to policyholders and beneficiaries. However, there are serious exceptions, such as discovering the policy was bought with intent to commit fraud or if a medical exam was falsified.
For added protection, the Medical Information Bureau (MIB) plays a key role by sharing data among insurers to detect red flags. This cooperative system helps keep the application process transparent and prevents dishonest claims from slipping through the cracks.
In short, while life insurance fraud can be elaborate and involve various tactics, the industry has developed multiple layers of defense to maintain fairness and protect against exploitation.
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Whole life insurance combines life insurance with an investment component.
- Coverage for life
- Tax-deferred savings benefit if premiums are paid
- 3 variations of permanent insurance: whole life, universal life and variable life include investment component
Term life insurance is precisely what the name implies: an insurance policy that is good for a specific term of time.
- Fixed premium over term
- No savings benefits
- Outliving policy or policy cancellation results in no money back
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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 this type of life insurance scam, the insured pretends to have died in order to collect the death benefit, either for themselves or a beneficiary. This fraudulent activity often involves fake documents or staged deaths, making it a serious crime with significant legal consequences.
- Pocketed premiums: Some dishonest agents engage in premium diversion by pocketing the payments instead of forwarding them to the insurance company. This may involve agents asking clients to make checks payable to them directly or sending fake cancellation notices. Always ensure your payments are made directly to the insurance company and check your policy status regularly.
- Bait and switch: In this scheme, an agent may sell you a policy with lower benefits or different terms than what you were led to believe. The agent typically earns a higher commission at your expense. It’s important to carefully review all policy details before signing.
- Application fraud: Misrepresenting details on your life insurance application, whether intentionally or not, is another common type of fraud. This could involve omitting health conditions or other important information that affects your risk level. Even if discovered years later, insurers may deny claims or cancel the policy if the misinformation is significant.
- Upgrade churning: Some agents may try to convince you to upgrade or purchase additional policies you don’t need just to earn extra commissions. If you’re already satisfied with your coverage, be cautious when approached with unnecessary upgrades or changes.
- Forgery: Fraud can also occur when someone unauthorized, like a family member or acquaintance, alters your policy without your knowledge. Changing beneficiaries is a common target in these situations, emphasizing the importance of keeping your policy secure.
- Fake policies: Scammers posing as legitimate agents can offer fake life insurance policies, often providing convincing documents and bills. To avoid falling victim to such scams, verify that any agent you work with is licensed and check their credentials through your state’s insurance department. Also, check that the insurance company is real and properly licensed.
These are just some of the ways life insurance scams can occur. Understanding these tactics and staying vigilant can help protect you from falling victim to fraud.
Life insurance fraud and faked deaths
Life insurance fraud involving faked deaths is a rare but audacious scheme that has surfaced throughout history, testing the limits of investigative methods and the law. One modern example is the infamous case of John Darwin, often referred to as the “Canoe Man.” In 2002, Darwin faked his death by disappearing during a canoeing trip in the North Sea. His wife subsequently claimed the life insurance payout, and Darwin lived in hiding for five years. The scheme unraveled when Darwin was discovered alive and well in Panama, leading to both him and his wife being convicted of fraud.
While these cases are not common due to the complexity and risk involved, they highlight the extreme lengths some individuals will go to deceive insurance companies. Today, insurers employ advanced techniques and collaborate with skilled investigators to detect and prevent such fraud, making it increasingly difficult for these schemes to succeed. The consequences for those who attempt such fraud are severe, as demonstrated by the significant legal penalties faced by John Darwin and his wife, who both served over six years in prison.
Life insurance fraud involving forgery
Forgery is a particularly insidious form of life insurance fraud, often slipping under the radar due to its deceptive nature. Imagine applying for life insurance, only to discover later that your policy has been tampered with and your chosen beneficiaries have been replaced without your consent. This unsettling scenario is more common than you might think, especially in today’s digital age.
Matt Schmidt, the owner of Diabetes Life Solutions, provides insight into how technology, while beneficial, can also be a double-edged sword. He explains, “With technology, you have to take the good with the bad. Electronic signatures can be a blessing, as they are oftentimes easy to use and make life easier on us. However, many life insurance carriers are learning that fraud occurs when an agent isn’t actually witnessing a signature.” The convenience of electronic processes, while streamlining application procedures, can unfortunately open the door to fraudulent activities when not properly monitored.
Schmidt also highlights a growing issue in the industry: life insurance applications being submitted without the insured’s knowledge or permission. “Insurance companies that are offering direct enrollment of their products without an agent working with the customer, have discovered that people are applying for life insurance without the insured’s permission,” he notes. In some cases, individuals have even gone as far as misrepresenting their location to access a product that isn’t available in their state.
These fraudulent activities underscore the importance of checks and balances in the insurance process. As Schmidt warns, “Fraud can continue to occur if you allow consumers to apply for insurance without having agent interaction.” His insights suggest that while technology offers many advantages, it also requires robust oversight to protect consumers from the darker side of convenience.
Agents implicated in some fraud schemes
Life insurance fraud isn’t just about deceitful policyholders or beneficiaries — sometimes, the perpetrators are the very agents who are supposed to uphold trust within the industry. Take, for instance, the case from Baton Rouge, Louisiana, where a life insurance agent, Timothy R. Schlatre, masterminded a scheme that defrauded insurance companies out of millions.
Schlatre, using his position at New York Life and Lincoln Financial, falsified applicants’ financial details to secure life insurance policies with inflated values, raking in commissions that he wasn’t entitled to. He didn’t act alone; several accomplices helped perpetuate the fraud by lying about their income and net worth on applications. The scheme was extensive, leading to life insurance policies exceeding $100 million in total value. To cover his tracks, Schlatre even paid the premiums for these policies himself. His actions were illegal under both company policies and state law.
The scheme unraveled, leading to Schlatre’s conviction and sentencing to 57 months in federal prison, along with a restitution order to repay over $1.4 million in fraudulent commissions. Six of his co-conspirators were also convicted, illustrating the severe consequences for those who engage in such deceitful practices. This case serves as a powerful reminder that fraudulent schemes, especially those involving trusted industry insiders, are met with swift justice, reinforcing the importance of integrity within the life insurance sector.
Consequences of insurance fraud
When it comes to life insurance, not every mistake is considered fraud. If you accidentally omit a minor detail, like forgetting to mention a doctor’s visit from years ago, insurance companies typically won’t treat it as fraud. Mistakes happen, and insurers understand this. If such an omission is discovered before the policy is approved, the insurance agent or company may simply reach out for clarification and adjust your rate or coverage if needed.
However, more serious consequences arise when deliberate misrepresentation occurs. For example, trying to manipulate your policy with false information is considered a form of life insurance fraud and can lead to severe repercussions. Depending on the nature of the misrepresentation and when it’s discovered, consequences can include:
- Application rejection: If significant misinformation is found before your policy is approved, the insurer could deny coverage outright.
- Premium adjustments: If inaccuracies are found within the contestability period (usually the first one to two years), the insurer might recalculate your premium or even adjust the death benefit in line with what you should have paid.
- Policy cancellation: If the fraudulent activity is discovered within the contestability period, the policy may be canceled altogether.
- Denied death benefits: If the misrepresentation is uncovered after the insured’s death during the contestability period, the insurer might reduce or deny the payout entirely.
- Legal consequences: Intentional acts of fraud, such as forging documents or faking a death, can lead to criminal prosecution, fines and potential jail time.
Understanding what constitutes life insurance fraud and its consequences is crucial to avoiding issues with your coverage. Accurate information is key to ensuring your policy remains effective and that your beneficiaries are protected in the event of your passing.
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 website. 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 advisor if you are confused or have any questions.
- Always make checks payable to the insurance provider, not the insurance agent. Criminals impersonating insurance agents — or unethical insurance agents themselves — 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.
Resources if you are a victim of insurance fraud
If you suspect you’re a victim of life insurance fraud, it’s important to act quickly to protect yourself and your finances. Here’s what you can do:
- Gather documentation: Collect all relevant documents, such as your insurance policy, receipts for premium payments and any communication you’ve had with your agent or provider. These documents will be crucial if an investigation is needed.
- Contact your insurance company: Start by reaching out to your insurer directly. Explain the situation and ask if they have a fraud investigation team. They may be able to resolve the issue internally or offer guidance on what to do next.
- File a complaint with your state insurance department: Each state has a department that oversees insurance practices. The National Association of Insurance Commissioners (NAIC) provides resources to help you locate your state’s insurance department and file a complaint. State insurance departments can investigate the issue and potentially take action against fraudulent agents or providers.
- Report to the Insurance Fraud Bureau: The Insurance Fraud Bureau (IFB) is another key resource. You can report suspected fraud directly to them. They specialize in investigating and addressing various types of insurance scams.
Key Resources:
- NAIC state insurance department locator | General questions: (816) 783-8500
- IFB: www.insurancefraudbureau.org | Phone number: (800) 422-0421
Dealing with insurance fraud can be unsettling, but these steps can help you regain control of the situation and ensure your concerns are addressed. Remember, you’re not alone, there are resources available to guide and support you through the process.
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