How to Spot a Life Insurance Scam

Some unscrupulous agents take advantage of what buyers don’t know about life insurance to push unsuitable plans.
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Written by Alice Holbrook
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Choosing the right life insurance policy is a big decision. After all, you’re committing to a policy for 10, 20, or 30 years — or even the rest of your life, in the case of permanent life insurance policies.

That’s why many people rely on insurance agents or financial advisors to help them find the right policy. Unfortunately, some unscrupulous agents — and some con artists — take advantage of what customers don’t know about life insurance to push unsuitable (or illegal) plans.

What should you be on the lookout for? Here are three common life insurance scams.

Stranger-owned life insurance

When you allow someone who doesn’t have “insurable interest” in you — unlike your family, for example — to own a life insurance policy on you, this is known as stranger-owned life insurance, or STOLI. In this situation, seniors typically take out a life insurance policy on themselves with the intent of transferring ownership to an investor or group of investors, in exchange for cash.

If you’re approached about an arrangement like this, keep in mind that it’s illegal in many states, and where it is legal, it’s frowned upon by insurers.

Inflating your net worth

In some instances, insurance agents fraudulently overstate your net worth on a life insurance application so that you qualify for a bigger policy than you need — and they score a bigger commission. Unfortunately, the policy may also be bigger than you can afford, leaving you no choice later but to drop it and lose your coverage.

In other cases, agents don’t even expect their customers to pay for the policy. In 2017, a California-based agent with an expired license was arrested for scamming elderly buyers out of $1.2 million over five years (2011 to 2016). The agent had promised to invest the victims’ money, and his license had expired in 2000.

Want to make sure you’re not a victim? When you're buying life insurance make sure you get a copy of your application and read it carefully for inaccuracies.

Annuities for the elderly

Life insurance companies often sell annuities, a financial product that invests buyers’ payments and then later provides a stream of income after a set period of time, often in retirement. If you have a chunk of money to invest, annuities can be a smart retirement income strategy, but only if you have some working years left — many annuities won’t pay out for 10 to 15 years and impose hefty fees for removing your money early.

Some financial advisors and agents manage to sell annuities to seniors, leaving them without a major source of retirement income for years, but providing the seller with the commission. If your agent is pushing a retirement financial product when you’re already in retirement, make sure you know when you’ll get paid before signing up.

Don’t be afraid to ask questions

Other life insurance scams are harder to detect. For example, an unscrupulous agent may try to sell you a policy that’s not in your best interest but that earns him or her a higher commission. Agents who recommend expensive, permanent life insurance — such as universal or whole life insurance — without a good reason, or who promote frequently switching policies, may be after your cash, and not the right policy for you. It’s worth asking some extra questions if you don’t understand why you need the coverage.

If you’re working with a new agent, you can also look that agent up on your state insurance department’s website. The department can tell you whether the agent is licensed and if there are any complaints filed against the agent. And if you are a victim of life insurance fraud, the department can open an investigation and help you get your money back.

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