Types of life insurance fraud

Why lying on your application is fraud.

Logan Sachon

Logan Sachon

Published October 26, 2018

Life insurance fraud is serious business with often high stakes: news stories, books, and films involving life insurance fraud are plenty, and they usually involve someone faking their death in order to get the death benefit paid-out.

But there are other ways to commit life insurance fraud, and when you’re applying for a policy, it’s important to understand what constitutes fraud and could result in either a rejected application, or worse, a refusal to pay a claim down the line.

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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

Application fraud is when you knowingly provide incorrect information to your insurance company when you’re applying for a policy. This is also called material misrepresentation, and according to one LA Times analysis, it’s responsible for two-thirds of disputed life insurance claims.

When you apply for life insurance, there are two types of information you give the insurance carrier:

  • the info you include in your initial application and supply to the agent during the mandatory phone interview
  • the information pulled from your medical records and medical exam

When the insurance underwriters are reviewing your application, the info in your medical exam and medical records are used to verify all the previous information you’ve shared.

If you forgot about a medical procedure you had a few years ago or hadn’t weighed yourself in awhile and reported a lower weight on your application than you weighed at your medical exam, this isn’t fraud. While the underwriters will adjust your health rating based on the verified info and your rates may be higher than initially quoted, you’ll still get an offer since you didn’t intentionally mislead them.

But if you explicitly lied in your application, your application may be rejected. For example, if you said that you’re not a smoker but your medical records reveal that you’ve been smoking for many years, the insurance company could reject your application on the ground of material misrepresentation. Alternatively, they could charge you even higher rates than if you had told the truth in the first place.

When applying for insurance, it’s important to be as truthful as possible throughout the application process. This not only ensures the accuracy of your quotes, it protects you from getting into trouble and having a rejected application or claim.

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2. Claims fraud

Claims fraud is the type of life insurance fraud that is more likely to make the news or be the basis of a movie, as it can involve faking a death. One type of claims fraud is commonly called death fraud. This is when people attempt to fake their own death or the death of the loved one in order to collect a life insurance benefit.

Another headline-making attempt to defraud insurance companies: the beneficiary killing the insured in order to get a payout. This is also rare, and illegal; laws make it illegal to profit from murder, and if a beneficiary kills an insured, the payout will go to the contingent beneficiary or to the insured’s estate.

These are both illegal and will result not only in denied claims, but could result in prosecution.

3. Forgery

Most life insurance fraud doesn’t involve the insured at all, but instead involves other parties accessing the policy and changing the policy owner or beneficiaries. Only the policy owner can change the beneficiaries or other details about a policy. This type of fraud can also result in denied claims and prosecution.

4. Phony policy fraud

A fourth kind of fraud is when scammers pretending to be insurance agents “sell” fake policies to unsuspecting customers and pocket the premiums. Like other kinds of financial scams, these scammers use brand-name recognition to get in the door, then request cash or direct payments.

You can protect yourself 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. For example, here is California’s..

Another tip: Life insurance payments should always be made out directly your actual insurance company. Brokers and agents can process the payments, but checks should be made out to the company itself, never an individual.

Other ways to protect yourself: Keep your contact information up-to-date, and don’t click on links that look funny or that ask you for your bank information.

Consequences of insurance fraud

The consequences of insurance fraud can range from your application being rejected to your policy being canceled and your claims denied to prosecution.

Rejected applications or higher premiums

The most common result of life insurance application fraud if 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.

It’s also possible that, depending on the severity of the lie, you could be granted a policy but at a much higher rate, as a penalty for lying.

Denied claims or canceled policies leave your family unprotected

If you lie about your health history and the underwriters don’t discover the truth in a medical records check and still offer you a policy, there is still a chance that your lie could be discovered down the road. That’s because life insurance policies have a one-to-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 had a previous diagnosis that you didn’t disclose or that you misrepresented yourself in any way, they could cancel your policy and deny your family’s claim. (You would get refunded the premiums you’ve paid, minus any 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.

The best way to avoid life insurance fraud is to be as honest as possible during all phases of your life insurance application.

Prosecution

Deceiving an insurance company in order to collect funds is a crime in all 50 states, and states have fraud bureaus devoted to these types of crimes. 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.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.