Fraud is a perennial problem in the insurance industry, and we all pay for it. The Anti-Insurance Fraud Coalition estimates that the industry as a whole costs insurers $308.6 billion a year to get customers to recover losses at higher rates.
According to the National Association of Insurance Commissioners, people commit as much as $74.7 billion in life insurance fraud every year — often to get lower premiums or to get money they’re not entitled to.
What exactly is life insurance fraud?
There are several types of life insurance fraud, and in some cases applicants and policyholders are unaware that they have committed the crime.
lie on your app
When you fill out the life insurance application, you will answer questions about your health, smoking status, lifestyle, hobbies and income. Insurance companies use this information to calculate the level of “risk” you want to cover and to set a premium, which is the amount you pay to keep your coverage active.
The goal is to be as transparent as possible. If you knowingly lie or leave out information in your application, this is a form of fraud known as a “material misrepresentation.” Now, forgetting your uncle’s high cholesterol doesn’t have to be a fraud. But if you say you’ve never smoked but you have respiratory problems from smoking, that’s true.
Insurance companies may also find out. During the underwriting process, the best life insurance companies pull third-party records to ensure that what you say is true. These may include:
- prescription drug records From the past five to seven years.
- driving record List major traffic violations.
- Report from MIBformerly known as the Medical Information Bureau, which contains information from past life insurance applications.
- credit history Check for bankruptcy.
Some policies also require a medical exam, which will reveal your weight, nicotine use, and other health concerns.
make false claims
This doesn’t just happen in Hollywood: Someone fakes their own death or fakes the death of a loved one to collect life insurance benefits.
Another type of claims fraud is where life insurance beneficiaries murder policyholders to get payouts. According to the National Insurance Crime Bureau, or NICB, if a life insurance policy was purchased shortly before the policyholder’s death, investigators may look into whether the beneficiary was trying to profit from the death.
Fake someone else’s policy change
Forgery falls under the umbrella of identity theft or account takeover fraud, said Russell Anderson, a certified fraud examiner and head of financial crime services at life insurance trade group LIMRA.
“It’s a place where a person pretends to be another person to visit them [life insurance policies] Steal some of their data, but probably not access and steal the cash value in those accounts,” Anderson said.
According to LIMRA, family members, friends, carers and people in relationships with the insured are often the culprits.
There are also instances where a third party impersonates the policyholder to change beneficiary or policy ownership without consent. In 2017, for example, Pennsylvania regulators fined a funeral director convicted of forging a client’s signature on a document that listed her business as a beneficiary of her policy.
The elderly and vulnerable adults are the main targets. In a recent survey, 43% of LIMRA member companies reported an increase in account takeover fraud from related parties, such as family members, from 2020 to 2021. In the same survey, about 34% of insurers said they saw an increase in account takeover fraud by third parties and account takeover fraud by unknown fraudsters.
The consequences of life insurance fraud are not good
The consequences of committing life insurance fraud vary depending on the severity of the case, with criminal charges on the higher end.
If the insurance company finds out that you lied on your application, they can deny your application or increase your rates.
If you die within the disputed period of two years after the policy is in force, the insurance company can delay the claim while it is investigating. They have the right to refuse or reduce payments to your beneficiaries if you leave out important details about your health – even if you die from an unrelated cause.
Avoiding and reporting life insurance fraud
If you believe you are the victim of fraud, please contact the National Insurance Crime Bureau at 800-TEL-NICB or file a report at NICB.org.
Most states also have insurance fraud bureaus, and Anderson recommends contacting your bank if you suspect your identity has been stolen.
To make sure you’re not fraudulent, accidental or otherwise:
- Be honest in your life insurance application. This is the best way to ensure your loved one gets paid.
- Work with a licensed agent or broker. These professionals can help you navigate the application process.
- Don’t let anyone else sign up for the insurance company’s online portal on your behalf. Many insurance companies allow policyholders to manage their coverage online. It’s important to opt for security features like multi-factor authentication, Anderson said.
- Check your beneficiaries. If you’ve gone through life changes, like getting married, update them.
Article 3 Common Types of Life Insurance Fraud – And How To Stay Smart appeared originally on NerdWallet.