A good life insurance policy can offer peace of mind, since you know your loved ones will be well protected in the event of your death. However, the process of shopping for a big enough policy at affordable prices can be stressful, especially when the market is often targeted by scammers. In fact, according to the Coalition Against Insurance Fraud (CAIF), insurance fraud is one of the country's biggest crimes, costing consumers at least $80 billion each year.
By learning about various scams, however, consumers can arm themselves against con artists and unscrupulous agents. If you're shopping for life insurance, this guide will help you identify the most common forms of life insurance fraud. We'll also give tips on how to protect yourself and explain what to do if you become a victim of fraud.
Types of Life Insurance Scams
Many different types of life insurance scams and dubious sales tactics have emerged over the years, some affecting certain groups more than others. Here are a few of the most common types.
Overselling a Policy
Life insurance agents usually work on commission, which means that they have an incentive to sell you a higher-priced policy. While upselling your policy isn't necessarily a scam, it does lead to consumers paying more than they should.
"This is the insurance industry's dirty little secret - they are not required to disclose commissions on any products that they sell to consumers," says Scott Page, retirement expert and author of It's Never Too Late: Getting Older, Wiser, and Worry Free in Our Golden Years. "If a consumer does not ask, they don't have to tell."
One thing some of these agents may try to add is a double-indemnity rider, which promises to pay your survivors double if you die in an accident. After a certain age, accidental deaths are less likely than an illness-related death. This means you'll be paying extra for all of those years you manage to avoid dying accidentally. Another extra to avoid is the waiver of premium rider, which promises to continue your coverage if you're suddenly disabled. This is yet another thing that is statistically unlikely to happen, especially during a policyholder's working years. In both instances, the customer gambles on something that is unlikely to happen while the life insurance agent pockets a higher commission.
Insurance Agent Fraud
As the Coalition Against Insurance Fraud notes, "The vast majority of insurance agents and companies are ethical, honest and trustworthy, but crooked agents and bogus insurers do exist." In rare cases, insurance agents directly steal from clients, setting money aside from a policy for themselves. One way this can be done is through quoting a premium to a customer for a policy that is never set up. Unless the victim calls to check up on the policy, the fact that a policy was never put in place likely won't be discovered until years later, when a loved one files a claim after the falsely-insured person dies. In some cases, the insurer quotes a premium that is higher than the actual cost and keeps the difference. Victims of any age can fall prey to insurance agent fraud, although some agents target the elderly based on the assumption they'll be more trusting. These unsavory insurance agents count on customers who don't raise questions. In some cases, these agents may even claim to be connected to a reputable agency, which helps them earn the trust of customers.
Once a customer has signed with an insurance agent, that agent has all of the information necessary to adjust features or draft new policies under that person's name. These agents realize that many customers don't regularly revisit their policies and instead merely pay the premiums when they're due.
Some agents approach customers with the offer to replace an existing policy with a new one of equal or greater value. The policy may be with the same insurance company or a new insurer, but in both cases the actual value of the life insurance is actually less than the original policy. An agent who suggests a customer switch to a more valuable policy for the same or lesser premium is perfectly within his or her legal rights to do so, as long as the change benefits the insured.
But when a customer is misled into switching to a less valuable policy, the practice is illegal. When a policy is replaced, an honest agent will provide documentation that clearly shows the benefits of the new policy, then have the customer agree to the changes. When an agent pushes changes without supporting documentation or detailed information, consumers should be suspicious.
Identity Theft Scams
Almost half of all data breaches relate to some form of stolen identity, and life insurance is one of many ways swindlers gather personal information on their victims and use that information to open accounts and make purchases. When identity theft scams involve life insurance, the customer hands over crucial information that can then be used to open new accounts and purchase items using the victim's contact information.
A victim of this scam will receive some type of communication from a person claiming to work for his or her life insurance company. The person may use one of the following excuses:
A relative has passed away and left money to the consumer. The criminal will then ask for financial account information or a social security number in order to expedite payment.
There's a problem with the customer's insurance policy and the caller just needs some critical information to fix it.
The customer's life insurance payment is overdue. The caller can process payment if the customer merely provides a credit or debit card number.
In the days immediately following this communication, the victim may have no idea his or her identity has been stolen. The criminal may merely use the credit card number to make purchases. If the information is used to open new bank accounts or credit cards or to purchase large items like a car, the consumer may find that corrective action is much more complicated. A stolen identity can severely damage a person's credit, leaving the victim responsible for remedying the situation with the nation's various credit bureaus.
How to Prevent Life Insurance Scams
It can sometimes be difficult to distinguish between a good and bad agent, but there are steps consumers can take to protect themselves. Here are a few tips that will help you as you look for the right life insurance policy to protect your loved ones.
Independent brokers have become more popular, especially since the Internet has made it easy to sign up and get recommendations. An independent broker shops multiple insurance providers to provide the best price to meet a customer's needs.
With the help of the Internet, you can learn about an agent before signing any documents. One resource to check is the Department of Insurance website specific to the state the agent practices in. Often this will help quickly identify any past problems. Make sure the agent has an active license with no reported sanctions, preferably over the course of many years.
The mere fact that an agent is with a well-known agency doesn't guarantee reliability. By reading reviews and learning more about an agency, however, you can verify its reputability.
If you're working directly with an agent, don't hesitate to contact that agent's insurance company to verify what you're hearing. If it's a respected agency and they can vouch for the agent's reputability, you can move forward with more confidence.
Friends and family can be invaluable in identifying a trustworthy agent. They will have already had personal experience with an agent and be able to verify that the experience has so far been a good one.
Fortunately, life insurance is a buyer's market, and there's no shortage of agents who are willing to give a quote. One of the best ways to get a feel for the many options is to price multiple policies. You can then compare what you're being offered and easily identify any scams. If someone is promising something significantly more for the same price if not lower than other insurers, that may be a sign that something is amiss.
Before signing with an insurer, read over all documentation carefully and identify any terms that might cause problems in the future. Make sure your policy documents detail the coverage you're getting for the premiums you're paying.
Many policies come with a free look period. During this time, you can cancel the policy if for some reason you realize it isn't what you thought. You should receive a full refund of premiums if you cancel during this time. In this trial period, do more research to make sure you haven't made a mistake. If something makes you feel uncomfortable, cancel.
Once your insurance policy is in place, you'll still need to be vigilant, especially if your agent suddenly suggests making a major change to your policy. If your agent is recommending something that will increase what you're paying each year, get a second opinion from a respected life insurance agent.
If you receive a call, email, or other communications about your policy, contact your agent or your life insurance agency to discuss it. Do not give out payment information, contact details, or your social security number unless you're 100 percent certain you're speaking to a trusted representative from a service you use.
How to Take Action if You Become a Victim
If you realize that you've likely been scammed, it's important to take action. First carefully review the terms of any agreements you've signed and determine if you can exit the agreement without penalty. If you're still in the free look period of your policy, you'll be able to cancel and receive a full refund of any premiums you've paid. (Of course, this may only apply if you've signed with a legitimate company.)
If you're beyond the free look period, you'll need to check into the cancellation policy. You likely won't receive a refund of the premiums you've paid, but you should be able to exit without penalty. You may want to line up life insurance with another carrier before contacting your agency to cancel to avoid an interruption.
For those who have signed with a fraudulent firm or agent, the cancellation process may be much more complicated. A fraudulent company may not be willing to cancel a policy based on one phone call or written notice. You may, in fact, get promises to cancel only to find you're charged again the next time your premiums are due.
For life insurance fraud, you'll need to contact your state's Department of Insurance and report the agent and/or agency. If the agent has a license, that license may be revoked as a result of your report, depending on the severity of the offense. Your state may also point you to the insurance fraud bureau, where you can file a report and possibly keep the agent from scamming anyone else.
Like every industry, the reputation of honest people can be damaged by a few bad apples. Brad Cummins, founder and owner of Local Life Agents, has heard a few horror stories in his decade in the business. However, he stresses that it's easy to find a good agent if consumers know what to avoid. Below he offers his valuable insights into fraud in the insurance industry.
What is the most common type of insurance fraud you've seen in your years in the industry?
From the consumer side, certainly insurers are deceived by policyholders' faked deaths. This is a crime that actually costs the life insurance industry hundreds of millions of dollars every year.
But on the other side of the fence, there are two types of fraud that consumers need to look out for: churning and pocketed premiums. Churning occurs when an insurance agent convinces a policyholder to upgrade to a "better" policy, which also costs more in premiums. This allows the agent to collect a nice additional premium.
Agents pocketing insurance premiums is another common scam. This can really be detrimental to people because they think that they are covered, but they really aren't. So, if you've purchased a life insurance policy and you've made out the check to the agent rather than to the insurance company, it's likely that the agent just pocketed the money and there isn't any coverage in force. And if the agent asks for the premium payment in cash, stop the transaction immediately.
You can also just simply say no to any transaction that doesn't seem right. If you are feeling pressured and/or if the agent is using scare tactics to get you to buy, this could also be a red flag.
What does a life insurance scammer look for in a victim?
Life insurance scammers can prey on any number of different victims, both young and old. Just one example is where fraudsters will contact recently widowed individuals and claim that their deceased partner had a life insurance policy that promises to pay out a large benefit, but the partner was behind on the policy's premium payment. Therefore, if the widow/widower just makes up for the premium shortfall, they will then receive the death benefit.
Existing policyholders can also be victims of insurance fraud. Here, they could be conned into converting their existing policy into a policy with another insurance company—a transaction that is referred to as twisting—regardless of whether the insured needs the new coverage or not. When this takes place, the agent receives a nice commission.
Do you have any advice for specific demographics?
Although anyone can certainly become a victim of insurance fraud, seniors can often be most at risk. Because many seniors may be looking to recoup lost market assets, there are some unscrupulous insurance agents out there who will promise to help them "recover."
To help ensure that you avoid being scammed, it can be beneficial to work with an advisor that you know and trust, and also to have a trusted friend or family member with you when meeting with anyone about your financial and insurance matters.
Here are a few resources that can help you if you believe you've been a victim of life insurance fraud:
The NAIC provides regulatory support to create the standards and best practices of the insurance industry.
The Coalition Against Insurance Fraud has created this directory of where to report fraud in each state.
The NICB is a not-for-profit organization that's dedicated to preventing, detecting and deterring insurance fraud and crime.
The Coalition Against Insurance Fraud lists the state statutes that involve insurance fraud.
This page allows people to file complaints about Internet crime, including identity theft and computer hacking.