Life Insurance Fraud – What it is and Types

Life insurance fraud is an illegal act where individuals lie to and deceive insurance providers to get life insurance coverage. What’s more, life insurance fraud can be committed either by the policyholder or the insurance company. For policyholders, this type of offense can be staging your death or another’s or putting down false and untrue information on the insurance application form.

Life Insurance Fraud - What it is and Types

This offense is quite popular in the United States of America, and even though it costs $40 billion to prevent it, a lot of people are still involved in this act, and if they are caught, they will pay the price of their actions. This is to show how severe life insurance fraud is, and it does not affect the people involved by making other individuals doubt the insurance system and leading to higher insurance premiums.

What is Life Insurance Fraud?

Life insurance fraud is an unlawful act that involves a person or a group of people providing false information, holding back information, and misleading the insurance provider to get benefits from a life insurance policy or quote. Some of these illegal activities can include faking death, applying for different quotes without disclosure, and exaggerating claims.

Types of Life Insurance Fraud

There are different ways that insurance fraud can be carried out. In some cases, the insurance provider commits the offense and not the policyholder.Some of them include:

Application Fraud

This takes place when a person enters untrue and false information during the life insurance application process to reduce premiums or get coverage under favorable terms. Some of the common instances involve lying about one’s habits, like smoking, holding on to information about risky hobbies, and health conditions.

Fake Policies

This is why some people claim to be insurance agents, market fake policies, and provide you with fake bills and fake documents. In other words, they claim to work with a major life insurance company, but you will pay the premium upfront to them directly.

Policyholder Fraud

This is a crime in which, to increase benefits and payouts, an old policyholder or an existing one manipulates their quote. For instance, someone might pretend to be dead or claim a beneficiary has died to illegally collect a life insurance payout. Consequently, they might lie about the value of their income to increase the worth of the policy.

Murder for Proceeds

Murder for proceeds is on the list of the most despicable types of life insurance fraud. This is a case whereby the policyholder is killed or murdered to get life insurance benefits. Multiple parties can be involved in this, and it is criminal and very complex.

Agent Fraud

Insurance companies can take part in committing fraud by forging the policyholders’ signatures, averting premiums for their selfish use, and selling unofficial insurance products.

Stranger-Originated Life Insurance (STOLI)

This is a scheme that involves investors convincing individuals, especially elderly people, to buy life insurance. However, they do not plan to give them coverage in the long run. Instead, they get to buy the insurance policy and have it transferred to the investor after a specific period in exchange for cash payments. When the policyholder passes away, the investor who pays the premium will get the death benefit.

Upgrade Churning

This occurs when an insurance company or agent persuades a policyholder to buy an additional quote to make extra premium payments or earn a commission, even when the policyholder is okay with their current coverage.

The Consequences of Such Actions

The consequences of life insurance fraud are severe and extensive:

  • Damage to credit and reputation.
  • Legal repercussions.
  • Financial impact on insurers and policyholders.
  • Canceled claims.
  • Prosecution.
  • Policy cancellation.
  • Premium increase.
  • Application rejection.
  • Death benefits from denial.

How to Prevent Life Insurance Fraud

Here are some of the things you should look out for when trying to spot an insurance scam:

  • Suspicious impersonators and agents.
  • Enhanced application screening.
  • Regular policy reviews.
  • Consumer education programs.
  • Strict agent and broker regulations.
  • Use of fraud detection software.
  • Education and training.
  • Whistleblower policies.
  • Collaboration with law enforcement.
  • Data analytics and AI.
  • Improved claim verification processes.

Frequently Asked Questions

Is there a reward for reporting insurance fraud?

Yes, some states and insurance companies offer financial rewards for information leading to the detection and prosecution of insurance fraud, though the specifics can vary.

How do I report insurance fraud?

Insurance fraud can be reported to the insurance company, local law enforcement, or through state insurance fraud bureaus. Many regions have dedicated hotlines and online forms for this purpose.

What happens if you commit life insurance fraud?

Committing life insurance fraud can result in criminal charges, leading to fines, restitution payments, and imprisonment. The exact penalties depend on the severity of the fraud and the laws in the jurisdiction where it was committed.