General insurance fraud costs Americans approximately $40 billion every year.  Common types of life insurance fraud include lying on an application to get cheaper pricing and altering someone else’s policy without their approval.
Life insurance policies are legally binding contracts, which depend on both parties being honest. If you commit fraud, you could be subject to higher policy premiums, have your application declined, or your coverage could be canceled. In more serious cases, life insurance fraud can be reported to a fraud bureau and brought to court.
What are the types of life insurance fraud?
There are four common types of fraud in life insurance:
Phony policy fraud
1. Application fraud
Intentionally providing false information to the insurer when you apply for life insurance is considered application fraud. You could, for example, try to lie about your health during the application process in an effort to lower the cost of your life insurance.
“Any health issues will come out in a prescription check or MIB report, and insurers test for drug and nicotine use,” says former Policygenius sales associate Hunt Harvey. “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.”
If the insurance provider finds out you lied on your application, it will increase your final premium at best, and at worst, it will deny your insurance application. “If you’re honest with us, we can match you with a company that will give you competitive pricing, like non-smoker premiums for marijuana or cigar users,” says Harvey.
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 considered fraud. You may receive premiums higher than initially quoted, but you’ll still get an offer since you didn’t intentionally mislead the insurance company.
2. Claims fraud
Claims fraud, commonly called death fraud, occurs when someone fakes their own death or the death of the loved one in order to collect the life insurance death benefit.
Another type of claims fraud is when a beneficiary kills the policyholder to get a payout. In addition to murder charges, the guilty party would also be punished for attempting to profit from murder. If you’re killed by a beneficiary, the payout goes to your contingent beneficiary or your estate.
While claims fraud is extremely rare, it does happen and usually results in criminal charges.
This type of life insurance fraud occurs when someone other than the policyowner accesses the policy and changes its ownership or named beneficiaries. It’s often a family member who commits forgery.
The policyowner is the only person who’s allowed to change the details of a policy. Someone would need to either forge documents or fake their identity to alter a policy owned by someone else.
You can have your claim denied and be prosecuted for forgery-based life insurance fraud.
4. Phony policy fraud
Scammers pretending to be insurance agents sometimes try to sell fake policies to unsuspecting customers and pocket the premiums. They may say they work for a recognizable, established brand to earn your trust, then request cash or direct payments for a fake policy.
Life insurance payments should always be made out directly to your 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 agent — but the payee should always be the insurance company itself, never an individual.
There are steps you can take to protect yourself from phony policy fraud:
Work exclusively with licensed insurance agents or brokers.
Reporting 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.
What happens if you commit 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.
If you commit claims fraud, phony policy fraud, or forgery, these activities are considered more serious and could result in criminal prosecution.
Rejected applications or higher premiums
The most common result of life insurance application fraud is a rejected application, which can prevent you from getting insurance elsewhere. The insurance company will verify the information you provide on the application, and if it determines that you lied, this will negatively affect its offer of coverage.
Depending on the details of the discrepancy, the insurance provider could still grant you a policy. However, it’ll come with higher premiums, and it’ll reflect any health conditions or lifestyle risks you misrepresented.
Denied claims or canceled policies
If you lie about your health history, but the insurance company doesn’t catch it, your lie could be discovered down the road.
If the insurer finds that you hid information, it’ll cancel your policy and deny or reduce your beneficiary’s claim, leaving them with little to no financial support. Your beneficiary is refunded the premiums you paid, minus administrative fees.
Deceiving an insurance company to collect funds is a crime in most states.  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 can go to court.
As long as you’re honest on your application and you’re working with a licensed agent or broker, it’s unlikely you’ll find yourself involved in any insurance fraud investigations. If you suspect insurance fraud, take action to report it to the appropriate agencies.