Types of life insurance fraud

Life insurance fraud can lead to denied death claims or even prosecution. Here’s what counts as fraud, how to prevent it, and how to report it.

Amanda Shih author photo

By

Amanda Shih

Amanda Shih

Editor & Licensed Insurance Expert

Amanda Shih is an insurance editor and licensed Life, Health, and Disability agent at Policygenius in New York City. Her work has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.

Updated October 5, 2020|6 min read

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Insurance industry organizations find that 78% of U.S. consumers are concerned about insurance fraud. While pop culture and news stories highlight fraud involving feigned deaths and murders for life insurance profits, there are less sensational and more common types of life insurance fraud, like purposefully misstating application information to get cheaper pricing or altering someone else’s policy without their approval.

In less serious cases of fraud, you might be hit with higher policy premiums, a policy denial, or cancellation of coverage. In more serious cases, life insurance fraud can be reported to a fraud bureau and brought to court.

Key Takeaways

  • Lying on your policy application, altering the owner or beneficiary of a policy you don’t own, and selling fake insurance policies are some more common fraud schemes

  • Application fraud may result in you losing your policy or having your application denied

  • State and federal bureaus investigate life insurance fraud and may prosecute more serious cases

The most common types of life insurance fraud

There are four common types of life insurance fraud: application fraud, death fraud, forgery, and phony policy fraud.

1. Application fraud

If you knowingly provide incorrect information to your insurance company while applying for a policy, that’s application fraud. This is also called material misrepresentation or concealment, and among the more common forms of life insurance fraud.

When you apply for life insurance, the insurer takes the information you provide in your application and standard phone interview with an insurance agent or broker, and evaluates that alongside your medical records or the results of a medical exam. Your medical records and exam are also used to verify the information you provided previously.

It’s fraud to withhold information or lie to receive more affordable premiums during this underwriting process. For example, if you say you’re not a smoker but your medical records or urine test reveal that you’ve been smoking for many years, that’s concealment. At best, the insurer will increase your final premiums and at worst, they will deny your insurance application.

“It can be tempting to keep information to yourself if you think it’ll increase your premiums, but not disclosing something will stretch out underwriting and make the insurer think you’re trying to hide something. You also expose yourself to the company denying a death claim if you die within the first two years of the policy and they find you lied,” says Policygenius sales associate Hunt Harvey. “Any health issues will come out in a prescription check or MIB report, and insurers test for drug and nicotine use. If you’re honest with us, we can match you with a company that will give you competitive pricing, like nonsmoker premiums for marijuana or cigar users.”

If you forget to mention a medical procedure you had a few years ago or mistakenly report a slightly lower weight on your application, that isn’t fraud. While the underwriter will correct your application and you may receive premiums higher than initially quoted, you’ll still get an offer since you didn’t intentionally mislead them.

2. Claims fraud

Claims fraud is the type of insurance fraud you may know from movies and news reports, as it can involve murder or faking a death. One type of claims fraud, commonly called death fraud, occurs when someone fakes their own death or the death of the loved one in order to collect a life insurance benefit.

Another type of claims fraud is when a beneficiary kills the policyholder in order to get a payout. This is extremely rare and in addition to murder charges, the guilty party would also be punished for attempting to profit from a murder. If you’re killed by a beneficiary, the payout goes to your contingent beneficiary or to your estate.

3. Forgery

Most life insurance fraud doesn’t involve the policyholder at all, but instead happens when other parties — often a family member or spouse — access the policy and change its ownership or named beneficiaries. Only the policyowner is authorized to change the details of a policy, and someone would need to forge documents or misrepresent their identity in order to alter a policy owned by someone else. Forgery-based life insurance fraud can also result in denied claims and prosecution.

4. Phony policy fraud

Scammers pretending to be insurance agents sometimes “sell” fake policies to unsuspecting customers and pocket the premiums. Like other kinds of financial scams, the fraudsters use brand recognition to earn your trust, then request cash or direct payments for a policy.

Life insurance payments should always be made out directly to your actual insurance company. Brokers and agents can process the payments, and that may involve sharing payment information over the phone — another reason to make sure you’re working with a licensed individual — but the payee should always be the insurance company itself, never an individual.

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How to avoid life insurance fraud

You can protect yourself from fraud schemes by only working with licensed insurance agents. Ask your agent for their license number and check them out on your state’s licensing website. For example, all of Policygenius’ license numbers are listed on our website. You can check each state’s licensure through their Department of Insurance page.

Review your insurance policy regularly to ensure that your beneficiaries and the ownership details are correct, and make plans for the safe management of your policy as you age.

Report life insurance fraud

If you encounter suspected fraud, contact the insurer that manages the policy with as many details as possible and share the information with a fraud bureau. Most states and the District of Columbia have an insurance fraud bureau that can investigate your report. If you’re unable to contact a local agency, you can make a report online with the National Insurance Crime Bureau or National Association of Insurance Commissioners.

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What is the punishment for life insurance fraud?

The consequences of insurance fraud vary based on the type of fraud committed. If you commit application fraud, your application could be rejected or your policy could be canceled, but claims fraud, selling phony policies, and forgery can end in prosecution.

Rejected applications or higher premiums

The most common result of life insurance application fraud is a rejected application. In fact, not only could your current application be rejected, the fact that you lied could be shared with other life insurance companies through the Medical Information Bureau (MIB), a database that tracks all of your life insurance applications. If you lie on one application, you may not be able to get a policy from any other life insurer, either.

Depending on the severity of the lie, you may be granted a policy, but it’ll come with much higher premiums as a penalty for lying and to reflect the health conditions or lifestyle risks you misrepresented.

Denied claims or canceled policies

If you lie about your health history, but the underwriters don’t discover the truth and offer you a policy, your lie could be discovered down the road. Life insurance policies have a two-year contestability period. If you die during this period, the company has the right to revisit your application and medical records to ensure that you were truthful in your application.

If they uncover that you failed to disclose a previous diagnosis or that you misrepresented yourself in any way, they could cancel your policy and deny your beneficiary’s claim, leaving them financially vulnerable. (Your beneficiary would only be refunded the premiums you paid, minus administrative fees.) Most policies also have language that ensures that fraudulent statements can be used at any time to void the policy, even beyond the contestability period.

Prosecution

Deceiving an insurance company in order to collect funds is a crime in most states, and a number of organizations are devoted to investigating insurance fraud. While you’re unlikely to face charges for lying on your application, other types of insurance fraud, including claims fraud and forgery, can end up in court.

The punishments for life insurance fraud are severe, but the good news is that as long as you are forthcoming while buying life insurance and work with a licensed agent or broker, it’s unlikely you’ll find yourself involved in any insurance fraud investigations. Should you encounter any suspected fraud, report it to the appropriate agencies.

Types of life insurance fraud FAQ

What is considered life insurance fraud?

Lying on your application, selling fake policies, forgery or faking identity to make changes to a policy you don’t own, faking your death, and killing someone in order to receive the death benefit are all types of life insurance fraud.

What is the punishment for life insurance fraud?

If you conceal or misrepresent information on your application, you may simply pay higher premiums if you’re caught in a lie. In the worst-case scenario, the insurer will deny or cancel your policy, which may prevent you from getting coverage in the short term and leave your beneficiaries financially unprotected in the long term. People who commit forgery or claims fraud may be prosecuted.

How do I report life insurance fraud?

You can report life insurance fraud through a state fraud bureau or an agency like the National Insurance Crime Bureau or National Association of Insurance Commissioners.