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Fraud is a persistent problem for the insurance industry, and it’s one we all pay for. The Coalition Against Insurance Fraud estimates it costs insurers $308.6 billion a year industrywide, leaving customers to recoup the losses with higher rates.
People commit life insurance fraud to the tune of $74.7 billion a year, according to the National Association of Insurance Commissioners — often to get a lower premium or receive money they’re not entitled to.
What is life insurance fraud, exactly?
There are a few types of life insurance fraud, and in some cases, applicants and policyholders don’t know they’re guilty of committing it.
Lying on your application
When you fill out a life insurance application, you’ll answer questions about your health, smoking status, lifestyle, hobbies and income. The insurer uses this information to calculate how “risky” you are to cover and to set your premium, which is the amount of money you’ll pay to keep your coverage active.
The goal is to be as transparent as possible. If you knowingly lie or omit information on your application, that’s a form of fraud known as “material misrepresentation.” Now, forgetting your uncle had high cholesterol doesn’t necessarily qualify as fraud. But if you say you’ve never smoked cigarettes and yet you have respiratory issues due to smoking, that does.
The insurer will likely find out, too. During the underwriting process, the best life insurance companies pull third-party records to ensure what you’re saying is true. These may include:
Prescription medication records from the past five to seven years.
Driving record listing major traffic violations.
Report from MIB, formerly known as the Medical Information Bureau, which contains information from past life insurance applications.
Credit history to check for bankruptcies.
Some policies also require a medical exam, which will reveal your weight, nicotine use and other health issues.
Filing a false claim
This doesn’t just happen in Hollywood: There have been cases of people faking their own death or faking the death of a loved one to collect the life insurance payout.
Another type of claims fraud is when a life insurance beneficiary murders a policyholder to get the payout. If life insurance is purchased shortly before the policyholder dies, investigators might look into whether the beneficiary sought to profit from the death, according to the National Insurance Crime Bureau, or NICB.
Forging changes to someone else’s policy
Forgery falls under the umbrella of identity theft or account takeover fraud, says Russell Anderson, certified fraud examiner and head of financial crimes services for LIMRA, a life insurance trade group.
“This is where one individual impersonates another individual with the intention of accessing their [life insurance policies] to steal some of their data, but more than likely not to access and steal the cash value in those accounts,” Anderson says.
Family members, friends, caregivers and people who have a relationship with the policyholder tend to be the main culprits, according to LIMRA.
There have also been cases where a third party pretends to be the policyholder to change the beneficiaries or policy ownership without consent. For instance, in 2017, Pennsylvania regulators fined a funeral director who was convicted of forging a client’s signature on a document naming his business as the beneficiary of her policy.
Older adults and vulnerable adults are key targets. In a recent survey, 43% of LIMRA’s member companies reported an increase in account takeover fraud from related parties, like family members, from 2020 to 2021. In the same survey, around 34% of insurers said they saw a rise in third-party account takeover fraud by unknown fraudsters.
The consequences of life insurance fraud aren't pretty
The repercussions of committing life insurance fraud vary based on the severity of the case, with criminal charges at the higher end of the spectrum.
Insurers can reject your application or raise your rate if they discover you lied on your application.
If you die during the contestability period, which is within two years of the policy going into effect, insurers can delay the claim while they investigate. And they have the right to deny or reduce the payout to your beneficiaries if you left out important details about your health — even if you died for unrelated reasons.
Avoiding and reporting life insurance fraud
If you believe you’re a victim of fraud, contact the National Insurance Crime Bureau at 800-TEL-NICB, or file a report at NICB.org.
Most states also have an insurance fraud bureau, and Anderson recommends contacting your bank if you suspect your identity has been stolen.
To make sure you’re not being fraudulent, whether accidentally or otherwise:
Be truthful in your life insurance application. This is the best way to guarantee your loved ones get the payout.
Work with a licensed agent or broker. These professionals can help you navigate the application process.
Don't let anyone else sign up for your insurer’s online portal on your behalf. Many insurers allow policyholders to manage their coverage online. Opting in to security features like multifactor authentication is important, Anderson says.
Check your beneficiaries. Update them if you’ve gone through a life change, like getting married.