Don't Become a Victim of Life Insurance Scams

The Federal Bureau of Investigation reports that insurance fraud results in losses of $40 billion per year. Often, insurance fraud conjures images of people filing phony claims or falsifying information on applications, but not all fraud is committed by the insured. Scammers frequently take advantage of older adults and people who don't have a thorough understanding of how insurance works. Educating yourself about life insurance scams can help keep you from falling victim to their ploys.

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The Most Common Life Insurance Scams

Although the specific details of life insurance scams vary, a few types are common.

Intentional Overselling

Life insurance agents are generally paid only on commission, meaning they have an incentive to sell. By law, agents must act in the best interest of their clients and recommend policies that benefit them. Unfortunately, not all life insurance agents comply. They may push you toward a more expensive form of insurance or encourage you to buy a policy that is much larger than you need.

In addition, life insurance agents may encourage you to buy extra coverage called riders that aren't necessary for most people. Two examples of commonly oversold riders include:

Double-indemnity, which pays double the death benefit if you die due to an accident
Waiver of premium rider, which allows you to maintain coverage without paying a premium if you become disabled.

While these riders can be beneficial for people who are at an increased risk of accidents and disabilities, not everyone needs them. Older adults are especially unlikely to need this type of protection because they are statistically less likely to die from an accident or to become disabled.

Fraud Committed by Agents

Dishonest life insurance agents may directly steal from clients by:

Charging more for an additional premium and pocketing the overage
Accepting a premium payment and never establishing a policy
Making up additional fees and keeping the proceeds

Life insurance agents may also engage in churning. With this scam, an insurance agent replaces a client's policy with another, often without their knowledge or permission. The new policy allows the agent to collect more commission. In addition, a life insurance agent may encourage the client to make the change themselves by claiming the new policy is better when in reality it's the same or less valuable.

Keep in mind that a suggestion that you change policies isn't always a sign of fraud. In some cases, a new policy may be beneficial. An agent is only churning if a policy doesn't truly benefit you.

Fraudulent Companies

Fraudsters may establish a fake insurance company and offer policies with no intention of ever paying a death benefit. Often, these fake companies operate for only a short period. After finding a few victims, the fraudsters establish a new fake company to lower the likelihood of detection.

Identity Theft Schemes

Fraudsters may use life insurance schemes to steal your personal information to sell or use themselves. Some common life insurance identity theft scams include:

Telling you that a distant relative has died and asking for your Social Security number or bank account information to deposit a death benefit
Claiming that there's a problem with your life insurance policy that you must give out personal information to fix
Insisting that your life insurance premium is past due and demanding payment by phone

Which Life Insurance Companies Are Legit?

There are more than 800 legitimate life insurance companies in the United States. According to the National Association of Insurance Commissioners (NAIC), the companies with the largest market share as of 2020 were:

New York Life
Northwestern Mutual
Metropolitan
Prudential
Lincoln National
MassMutual
State Farm
Aegon Life
John Hancock
Minnesota Mutual

The best way to determine whether a life insurance company is legitimate is to contact your state's department of insurance.

Do Life Insurance Companies Contact Beneficiaries?

Usually, life insurance companies learn of someone's death from a beneficiary of a policy filing a death benefit claim. After that initial notification, the insurer may contact any additional beneficiaries about the claim. Normally, life insurance companies communicate through regular snail mail sent through the U.S. Postal Service. They rarely contact beneficiaries by phone or email.

If someone contacts you claiming to work for an insurance company, do the following:

Ask for the name of the insurance company the person represents.
Look the company up on the internet and see if it exists.
Determine where the company's headquarters are.
Check with the state's Department of Insurance to see if it's a real, licensed company.
Contact the customer service of a legitimate insurer through the phone number on the official website.

Don't rely on a phone number or website address provided over the phone or in the suspicious letter or email because the info may lead back to the scammer.

How to Protect Yourself from Scams

Following these tips can reduce the risk of you becoming a victim:

Research the insurance agent, insurance agency and insurance company before you sign.
Contact the main customer service number for an insurance company to verify information.
Request references from a new agent and read online reviews.
Compare rates and policies from more than one insurance company.
Read the entire insurance contract before you sign.
Look over your monthly statements carefully.
Keep a careful record of your premium payments.

What to Do About Scams

How to proceed if you've been the victim of a scam depends on whether you bought from a legitimate insurer.

If You Bought From a Legitimate Insurer

If you didn't fully understand what you were purchasing or were a victim of churning, you may be able to cancel the policy. All life insurance policies have a free look period. State laws establish the length of the period. Often, it's around 10 days. During the free look period, you can cancel your policy and receive a full refund for any premiums paid.

Beyond the free look period, you'll need to cancel the policy. Normally, you can't get back premiums paid after the free look period. Contact the insurance company's customer service department for assistance. If you feel the employee intentionally misled you, file a complaint with the agent.

If You Bought From a Fake Insurance Company or Agent

Notify your state's Department of Insurance as soon as possible. You'll likely need to file a report with the state insurance fraud division or department. In addition, you may need to file a police report so that the authorities can investigate the scam.