Detecting Life Insurance Fraud: Strategies For Success

Life insurance fraud is a costly and challenging problem for the insurance industry, with an annual price tag of over $40 billion in the US alone. It occurs when an insured person, policyholder, or beneficiary deceits or falsifies information to benefit from a policy. This can range from withholding information to full-blown scams, including policies on fake individuals and even murder. To combat this, insurance companies are employing new strategies and technologies, such as special investigation units and AI-powered monitoring software, to detect and prevent fraud. With fraud on the rise globally, fuelled by the COVID-19 pandemic, it is more important than ever for insurers to stay vigilant and adapt their approaches to protect both themselves and their customers.

Medical misrepresentation

Insurers have various practices in place to detect and limit the impact of medical misrepresentation, often with dedicated teams in place that take advantage of fraud prevention tools and technological advances. Small special investigation units, in addition to underwriters and claims staff, are usually dedicated to fraud prevention and detection. However, there is significant variation in the size and sophistication of these internal investigation units.

Some red flags that may indicate medical misrepresentation include:

• Inconsistencies in the application form, such as inaccurate reporting of weight or smoking habits.
• Failure to disclose pre-existing medical conditions.
• Discrepancies in medical records or other external sources of verification.

To prevent medical misrepresentation, insurers can employ various tools and techniques, such as:

• Underwriting processes: This involves evaluating the risk associated with insuring an individual based on their medical history and current health status.
• Data validation tools: These tools can help identify inconsistencies or inaccuracies in the information provided on the application form.
• Verification through external sources: Insurers can cross-reference the information provided on the application with medical records or other relevant data sources.

By leveraging these tools and conducting thorough investigations, insurers can minimise the impact of medical misrepresentation and protect the integrity of the insurance contract.

Agent fraud

Fake Policies

Scammers pretending to be insurance agents try to sell fake policies to unsuspecting customers and pocket the premiums. They may claim to work for a well-known insurer and request cash or direct payments. To avoid this scam, always verify that the agent is licensed and check their credentials through your state's insurance department. Ensure the insurance company is legitimate and properly licensed.

Premium Diversion

This is the most common type of insurance fraud. It occurs when an insurance agent fails to send premiums to the underwriter and instead keeps the money for personal use. Agents may ask clients to make checks payable to them directly or send fake cancellation notices. To protect yourself, always make payments directly to the insurance company and regularly check your policy status.

Bait and Switch

In this scheme, an agent sells a policy with lower benefits or different terms than what was initially offered. The agent earns a higher commission at the customer's expense. Be sure to read the fine print of the policy and get all the details in writing before purchasing.

Application Fraud

Agents may misrepresent or omit important information on a customer's behalf to secure a policy with better coverage or lower premiums. This can include lying about health conditions or other risk factors. Even if discovered years later, insurers may deny claims or cancel the policy.

Upgrade Churning

Agents may try to convince customers to upgrade or purchase additional policies they don't need to earn extra commissions. Be cautious when approached with unnecessary upgrades and only make changes if you're sure they're in your best interest.

Pressure Tactics

Crooked agents may pressure customers to buy or switch policies frequently, especially if their existing policy has built up significant cash value. Agents can increase their salaries each time the customer enlarges their coverage. Be wary of agents using intense sales tactics and urging you to make a decision immediately.

Dishonest Advertised Rates

Some agents advertise life insurance plans at extremely low rates to attract potential customers. However, these rates may be misleading, and customers may end up paying much higher premiums after being rejected for the initial plan. Be suspicious of advertised rates that seem too good to be true.

To protect yourself from agent fraud, always work with licensed insurance agents, verify their license numbers, and make payments directly to the insurance company. Be cautious when providing personal or financial information, and don't be afraid to ask questions and seek clarification. Remember that legitimate agents will be transparent and provide you with the information you need to make informed decisions.

Criminal fraud

One of the most well-known types of criminal fraud is faked deaths. This involves the insured pretending to have died, often with staged deaths or fake documents, to collect the death benefit for themselves or a beneficiary. This type of fraud has severe legal consequences, as seen in the case of John Darwin, who was convicted of fraud and served over six years in prison.

Another type of criminal fraud is pocketed premiums, where dishonest agents engage in premium diversion by keeping payments instead of forwarding them to the insurance company. They may ask clients to make checks payable directly to them or send fake cancellation notices. Policyholders can protect themselves by always making payments directly to the insurance company and regularly checking their policy status.

Bait-and-switch schemes are also common, where an agent sells a policy with lower benefits or different terms than what was initially offered, earning a higher commission in the process. Policyholders should carefully review all policy details before signing and be wary of high-pressure sales tactics.

Application fraud is another prevalent issue, where individuals misrepresent details on their life insurance application, such as omitting health conditions or other important information. This can lead to denied claims or policy cancellation if discovered within the contestability period, which is usually one to two years.

Forgery is a particularly deceptive form of criminal fraud, where an unauthorized person alters a policy without the policyholder's knowledge. Changing beneficiaries is a common target, so it is crucial to keep policy information secure.

Fake policies are also offered by scammers posing as legitimate agents, providing convincing documents and bills. Policyholders can protect themselves by verifying the agent's license and credentials through their state's insurance department and ensuring the insurance company is properly licensed.

To detect and prevent criminal fraud, life insurance companies are incorporating fraud detection into their overall operations. They are hiring special investigation units, implementing sophisticated fraud detection strategies, and using monitoring software that incorporates artificial intelligence. Additionally, 42 states and the District of Columbia now require insurance companies to report fraud to the appropriate bureaus and agencies, helping to maintain accurate data on insurance fraud.

False identities

Life insurance agents can also create false identities by posing as legitimate agents or using fake identities to sell fake policies. They may request cash or direct payments, which should raise a red flag as payments should always be made to the insurance company, not an individual. These scams often come to light when beneficiaries try to file a claim, only to discover that the policy was fake. To avoid falling victim to these scams, it's important to verify the agent's license and credentials through your state's insurance department.

Forgery is another form of fraud where an individual unauthorized to make changes, such as a family member or acquaintance, alters a policy without the policyholder's knowledge. This can include changing beneficiaries, emphasizing the importance of keeping policy information secure.

To prevent false identity fraud, it's crucial to implement proper claim controls and processes, train and educate staff on the latest fraud schemes and red flags, and collaborate across different business units to identify potential fraud indicators. By following these steps, insurance companies can protect themselves and their customers from the financial and emotional consequences of life insurance fraud.

Fake deaths

Faking one's death to claim life insurance is an uncommon but costly form of fraud. It is a serious crime with significant legal consequences. While it is difficult to pull off, it does happen, and those who attempt it face a life on the run and big penalties if caught.

Body identification: Ask key questions such as whether the police were called to the scene and how the insurer can access the police report. The police report typically includes witness statements and evidence that help establish the circumstances of the death and the identity of the deceased.

Medical records: If the deceased was taken to a hospital, request medical records and enlist medical professionals to review them, ensuring they belong to the departed person. Dental records can also aid in physical identification.

Autopsy access: Obtain an autopsy report as soon as possible if an autopsy was performed.

Death certificate: Verify the death certificate, but be aware that this can be challenging in unfamiliar jurisdictions. Understand the local process for issuing death certificates and be cautious if the usual process was not followed.

Cremation: In most jurisdictions, a death certificate is required before cremation, and some religions mandate prompt cremation. Inquire about the timing and reason for cremation.

Appropriate documentation: Ensure that any documents are admissible as evidence in court proceedings and consider requiring notarization and an apostille for further authentication.

Assets: Inquire about the assets in the estate. If the only significant asset is the life insurance policy, this may indicate fraud.

Last Will and Testament: Obtain a copy of the will and information about the executor, including their name and relationship to the deceased. If the executor is not a close family member or friend, there may be cause for concern.

Local investigator: Engage a reputable local investigator with a high level of language proficiency to assist in the investigation, especially if the death occurs in a country unfamiliar to the insurer.

Legal counsel: Seek legal advice to preserve privilege and confidentiality in communications. Carefully manage multiple communications to avoid waiving privilege.

Frequently asked questions