Life Insurance Fraud: Types and Implications

Life insurance concerns policyholders and insurers. Many people engage in "soft fraud" such as lying on forms but what happens if things get out of hand? Today we will explore some common forms of life insurance fraud and their implications.

By Carla Rodriguez | Apr. 24, 2024 | 5 min. read

In 2016, the Coalition Against Insurance Fraud (CAIF) was surveyed to get a handle on the issue. They asked insurers about the problem of people faking their own deaths, and Dennis Jay, the CAIF’s executive director, described it as a “moderate category” issue, noting, “We are seeing a fair number of them.”

So, why isn’t there hard data on life insurance fraud compared to auto or health fraud? Steve Rambam, director of investigative agency Pallorium Inc., explains, “It happens more than the insurance carriers are comfortable admitting.” He’s been investigating such cases for years, hired by carriers themselves, and he says, “They don’t want to give anybody ideas.” In other words, making these fraud reports more public and detailed could inspire copycats. Given that life insurance policies can be worth millions, keeping a lid on the specifics helps mitigate that risk.

How common is life insurance fraud? Makes up 24% of all insurance fraud equating to 74.7 billion annually

What is the Contestability Period?

It’s important to know about the contestability period because this is a time to further investigate a claim that may seem suspicious. As an insurance adjuster, This is your time to ensure everything checks out before paying up.

Imagine you’re an insurance adjuster reviewing a life insurance claim for someone who passed away just six months after their policy started. The cause of death is listed as a heart attack. However, during your investigation, you discovered that the policyholder had a history of heart disease that they didn’t disclose on their application.

The contestability period, which typically lasts two years from the policy’s start date, gives you the authority to thoroughly investigate the claim. In this case, you find that the policyholder misrepresented their health condition, which would have likely affected their eligibility for coverage or the cost of their premiums.

As a result, the insurance company can deny the claim based on the misrepresentation, saving them from paying out a fraudulent claim.


The Most Common Life Fraud: Forgery

Let’s discuss 2 out of the 4 most common types of life insurance fraud:


Forgery within the life insurance industry often involves someone other than the policyholder gaining access to the policy through deceit. This can happen within families, where a member forges documents to change the ownership or beneficiaries of the policy. Surely enough, this is the tamest form of fraud compared to faking a death or committing a murder. The fraudster uses forged signatures or documents to misrepresent themselves as the policyholder. They then wait for the policyholder to pass away, which can lead to confusion and even anger when the policy is discovered to be altered posthumously.

Example: In Pennsylvania, a funeral director was caught changing policy owner and beneficiary information from the original family to the funeral home itself.

Phony Policy Fraud:

Phony policy fraud is perpetrated by fake insurance agents selling non-existent policies to unsuspecting consumers and pocketing premiums. These criminals often use well-known and trusted insurance company names to gain the trust of their victims. They may request direct payments to open the contract and can even collect multiple times from consumers who believe they have legitimate policies.

Example: A fake insurance agent sells a policy to a client, collects the premium, and disappears without issuing any valid policy documents.  Leaving the victim at a loss and without any life insurance coverage.

In both cases, careful attention to detail and thorough verification processes are crucial to detecting and preventing fraud. It’s essential to be diligent in verifying the authenticity of policies and any changes made to them, especially when unexpected beneficiaries or circumstances arise.

Application Fraud:

So, you know how sometimes people tell a little white lie to save a few bucks? Application fraud occurs when someone intentionally provides false information to an insurance company. This could be anything from lying about your smoking habits to concealing a pre-existing health condition. It’s one of the most common forms of insurance fraud, mainly because the temptation to lie on an application is often high.

For example, if you smoke, your insurance premium will be higher. So, it’s easy to see why someone might say they don’t smoke to avoid the additional cost. To combat this, insurance companies often review medical records or conduct exams to verify the information provided. According to Hunt Harvey at Policygenius, being honest on your application can lead to better pricing. He explains, “Any health issues will come out in a prescription check or MIB report, and insurers test for drug and nicotine use. If you’re honest with us, we can match you with a company that will give you competitive pricing, like nonsmoker premiums for marijuana or cigar users.”

Death Fraud:

Now, this one’s straight out of a movie plot. Death fraud, also known as pseudocide, is when someone pulls a disappearing act or fakes their own death to cash in on an insurance policy. In these cases, there is usually more than one person involved, as you need someone else to stake the claim for the payout. Even more serious is when a beneficiary murders the policyholder to collect the benefit. While these cases are rarer, they happen more often than you might think. If the killer is caught, the benefit would typically go to a contingent beneficiary or the policyholder’s estate.

Forgery involves falsifying documents, signatures, or information to secure a life insurance payout. This could include forging a policyholder’s signature on a document or altering medical records to conceal pre-existing conditions. Insurers use forensic experts and other tools to detect forged documents.


Life Insurance Fraud Red Flags

In our next blog, we will discuss the red flags you will now be more familiar with spotting on your next life insurance claim case. Knowing the ins and outs of fraud schemes helps you recognize the warning signs. Whether it’s a suspicious claim or an altered document, you’ll be the first to spot it and take action.