Ideally, buying life insurance should be relatively easy and straightforward. Unfortunately, in some cases, scammers can make the process far more dangerous and complex.
As a consumer, you need to be aware of the various life insurance scams and tricks so that you know how to spot them if they occur. While the vast majority of insurance companies and agents are reputable, a handful of bad actors cost families billions of dollars every year.
So, with that in mind, we’re going to dive deeper into these various schemes and show you how to avoid them. This way, you can be sure that you’re getting the best value for your money and that your family will be provided for when you’re gone.
Most Common Life Insurance Scams
Overall, identity theft is the fastest-growing form of crime in the U.S. Roughly ten percent of Americans have been victimized this way, with around a fifth (21 percent) having dealt with ID theft multiple times.
When it comes to life insurance, thieves can steal your personal information in various ways. Since you have to provide details to the insurance company, including your social security number, credit card information and billing data, individuals can copy that info and use it to steal from you.
Unfortunately, part of the reason identity theft is on the rise is that it’s easy to access some of this data. For example, someone could call you, claiming to be from the insurance company. They may ask you to verify details on your account, including your SSN or credit card. Another tactic could be sending you an official-looking message via email.
In some cases, thieves may steal your data from discarded documents, such as account statements and bills. Usually, they will go through your trash or recycling to find these papers, so you won’t know until something happens to your account.
If you ever get a call from your insurance company, be sure to ask questions and verify the phone number. Also, if the person is insistent on getting your personal information, the call is likely a scam.
Similarly, don’t send sensitive details over email, as they can be stolen, even if the sender is legitimate. Finally, be sure to shred any documents that contain personal information.
Keep in mind that many companies only ask for the last four digits of your social security number. So, even if a thief doesn’t know the whole thing, he or she might be able to access your account anyway.
There are two primary types of life insurance: term and whole. As a rule, whole life insurance is much more expensive because it builds cash value portion over time. Before buying a policy, you must understand the benefits and downsides of each option.
A policy-switching scam can work in a couple of different ways. First, an agent may ask you if you want to save money on your insurance policy. Once you say yes, the agent switches you to a different policy that doesn’t offer the same coverage.
So, you start paying less without realizing that your benefits are either reduced or eliminated. Usually, this happens when an agent tries to switch you from whole to term life insurance.
The second way policy-switching can occur is if the agent adjusts your coverage without telling you. Usually, this happens because the scammer wants to start skimming from your premium payments.
In this case, you still pay the same amount each month, but less money goes toward your policy. This type of scam can take a while to notice if you aren’t paying attention. This is also known as policy diversion, as funds are diverted from your account into another.
The best way to avoid this problem is to get precise details from your insurance agent. Also, be sure to check in on your policy regularly to ensure that nothing has changed without your consent. Otherwise, you could be losing money without knowing it.
Like policy-switching, this scam can involve an insurance agent changing details within your policy or “upgrading” you to a new one. Typically, churning happens for a couple of different reasons.
First, if you have coverage that pays annuities, the policy likely has a 10 to 15-year wait limit. By putting you onto a new, similar plan, the time resets, and you can’t withdraw funds without incurring a huge penalty.
Second, an agent may switch you to a new plan with a different company. In this case, both agents make a commission on the sale. In extreme instances, churning can occur with multiple agents and companies until there is no money left to pay the premiums. Usually, however, this kind of fraud happens with business insurance, as the costs are much higher.
The best way to avoid churning is to ask for documentation regarding any upgrades. A reputable agent will provide you with all of the details before getting your approval. However, if the agent seems pushy about it, chances are that he or she is fraudulent.
Fake Company Credentials
Typically, most life insurance fraud occurs because an agent within a reputable company is doing something illegal. However, in some instances, the company may not exist at all.
In this case, the scammer pretends to work for a reputable insurer, usually by creating fake documents with an official-looking letterhead. Sometimes, the scammer will create a whole new company, complete with a website and email address. In those instances, the scammer will receive all of your personal information, meaning that he or she can do some real damage to your credit score.
Before buying life insurance, be sure to research different companies. If an agent approaches you from a brand you haven’t heard of before, do an online search before moving forward. The agent may claim to be with a reputable company, so you should be able to verify that information as well. If nothing else, you can call the business and ask for the agent by name.
Overselling Policy Benefits
Technically speaking, this tactic isn’t an illegal scam, but it is unethical. In this instance, an insurance agent will try to get you to buy more coverage than you need to score a higher commission. In extreme cases, the agent may lie about your net worth and assets so that you can qualify for more expensive coverage.
Fortunately, the best way to avoid this scam is to know what you want before speaking to an agent. Also, never make a final decision until you’re ready. Be sure to read the fine print on any document and ask questions about anything you don’t understand. Scammers prey on the uninformed, so having this knowledge can keep you safe.
Other Examples of Life Insurance Fraud
While the scams we listed are the most common, some scammers can get creative. Here are a few less-common scams to watch out for when signing up for a policy.
- Faked Death – It is pretty rare to have an agent fake your death to receive the insurance benefit, but it has happened. Usually, it will occur when a policy is about to mature or if you try to cancel your coverage. However, because the insurance company will want to verify your death certificate, it’s hard to get away with this scam.
- Stranger-Owned Life Insurance (STOLI) – Typically, this scam involved senior citizens. A scammer will ask the individual to buy an insurance policy and transfer ownership in exchange for cash. This process is illegal in most states, and many insurance companies don’t approve of the practice.
How to Avoid a Life Insurance Scam
Because these scams can have such disastrous consequences, you have to know how to avoid them. These tips are useful for all kinds of scams, not just those involving life insurance companies.
Usually, scammers take advantage of people who don’t know anything about what they’re getting. This is the primary reason why thieves tend to target the elderly. Since older individuals may get confused more easily, they are ripe for fraud.
If you don’t understand something about a policy, ask the agent about it. Reputable agents and companies will provide as much information as necessary to ensure that you know what you’re getting. Don’t worry if you think that you’ll look foolish; it’s always better to be safe than sorry.
Read Your Policy Details
Another way that scammers get away with fraud is to bury details into contracts and agreements. If you skim through the paperwork, you might agree to something without realizing it.
Yes, it can be difficult to thoroughly go through a complex legal document, but it’s necessary to avoid getting scammed. One option is to have someone you trust to read through it or to have an attorney look at the documents. This way, you can be sure that you didn’t miss anything by accident.
Research the Company or Agent First
Thankfully, with search engines like Google, it’s never been easier to research someone. Whenever you get approached by an agent, you can usually find them online in a few minutes.
If you haven’t heard of the insurance company, one excellent method to verify if it is legitimate is to search “[company name] scam.” This way, any complaints or notices will pop up immediately.
Also, we recommend searching for the brand through the Better Business Bureau (BBB). While the BBB doesn’t have reports on all companies, it can give you more insight than you would get from other sources. For example, if there are any complaints against the business, they should be listed there.
Know What You Want Beforehand
To avoid a scam like policy switching or overselling, you need to know some details about life insurance. While we won’t get into too much information, here are the basics you should understand before obtaining a policy.
- Term life Insurance – Term life insurance covers you for a specific period (i.e., 20 years). Once the term ends, so does your coverage. These plans are relatively cheap and can offer significant death benefits.
- Whole life Insurance – This policy will cover you as long as you make premium payments. A portion of your payment goes into a cash value fund, which builds over time. Whole life insurance premiums will go up regularly as you get older, so you have to be aware of any increases.
- Beneficiaries – When setting up life insurance, you have to name one or more recipients. Typically, you can’t name minors until they turn 18. However, you can set up a trust that will pay out once the child becomes a legal adult.
- Insurance Riders – Many companies will offer life insurance living benefits, which take the form of insurance riders. Some examples can include accidental death and dismemberment (AD&D) or long-term care insurance. Usually, these riders cost extra, so be sure that you know what they entail and when they pay out.
Check In On Your Policy Regularly
Finally, the best way to avoid scams is to be aware of your insurance coverage at all times. Usually, scammers know that individuals ignore changes in benefits, so they can get away with fraud for months or years before they’re discovered.
We highly recommend checking in on your policy annually. Set an appointment with your agent to go over the details. Not only can these meetings help you avoid getting scammed, but they can allow you to make adjustments to your policy as needed.
Contact NextGen Life Insurance Today
When buying life insurance, it helps to compare rates and plans from different companies. At NextGen Life Insurance, we make it easy to look at policies to find the right one. Don’t go through this process alone; let us help you get the coverage and peace of mind you deserve.