Types of Life Insurance Fraud

Life insurance fraud occurs when someone deceives an insurer for personal gains.

Common types of life insurance fraud include phony policy fraud, application fraud, forgery, or death fraud.

Less serious frauds, like providing false information on the life insurance application, can lead to higher premiums, coverage denial, or cancellation of an existing policy. Serious fraud, like forgery or death fraud, can lead to hefty fines or substantial jail time. 

Let's dive into more details.

Common types of life insurance fraud

There are many different types of insurance frauds. In many cases, the insurance agent or someone else — not the policy owner — is the culprit. 

1. Phony Policies

Fraudsters sometimes pose as insurance agents and try to sell you policies that do not exist. They may call you or visit you in person, say they work for a reputable brand to avoid suspicion, and offer you a cheap insurance policy.

Typically, they will request a personal cheque or cash as payment for the insurance policy. Insurance fraud may not come to light until your beneficiaries try to make a claim. 

2. Beneficiary scam

This type of scam involves a fraudster contacting you and claiming that you are entitled to the proceeds of a life insurance policy belonging to someone who has recently died. However, because of an outstanding premium balance, they are unable to issue the payment. They will then ask you to pay the balance and run off with your money.

3. Forgery

This type of fraud occurs when a person forges a policyholder’s signature to access the policy and change the policy owner or beneficiary. A variation on this type of scam involves an agent purchasing a policy on behalf of a client without their consent to collect the commission. 

4. Fee churning 

Churning and twisting are two unethical practices an agent might do to convince a client to replace their existing policy with another policy that has similar or worse benefits. In both cases, the policyholder gains little while the agent pockets a handsome commission. 

Churning occurs when an agent convinces you to switch to another life insurance product with the same provider, even though the new product is not better than the previous one. Twisting, on the other hand, occurs when an agent convinces you to switch to an allegedly better policy with a different life insurance company. 

5. Application fraud

When you apply for life insurance, the insurer will ask you questions about your health, personal and familial medical history, smoking status, hobbies, lifestyle, and income. This information helps the insurer evaluate your insurability and determine premium rate. 

Lying on your life insurance application is fraud. That said, the lie must be intentional to be considered as material misrepresentation. This means you have an omission or untrue statement that influences the insurer’s choice on whether or not to provide a policy, and if they do provide one, what premium rate to charge. Listing a slightly lower weight on the application does not necessarily qualify as fraud. However, stating that you have never smoked when you have a lung condition due to smoking does. 

If you lie on your life insurance application, there’s a strong chance the insurer will find out during the application process. Depending on the severity of the lie, it may increase your premium rate, reduce your coverage amount, or deny you coverage. 

Even if your lie makes it through the application process and you are able to secure coverage, your fraudulent behavior can have serious consequences for your family. All life insurance policies have a period of contestability, usually two years. If you die during the contestability period, the insurance company can re-evaluate your application for fraud. If the insurer finds out that you intentionally lied, they can cancel the coverage, meaning your family does not get the money you intended for them.   

6. Claims fraud

This type of life insurance fraud involves someone faking their death or the death of a closed relative to collect the insurance proceeds. Another example of claims fraud is when a beneficiary murders the insured to collect the payout. 

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How do you avoid life insurance fraud?

Since lying on your life insurance application can lead to serious consequences, you should be honest with your insurance company. Other than that, use the following tips to avoid fraud. 

• Work only with licensed agents or brokers: Before working with an agent or broker, ask for and check their license number. 
• Read the fine print: Read the insurance contract carefully before signing to ensure you understand what you are agreeing to. 
• Question changes: If your agent or broker is recommending a life insurance replacement that is significantly expensive or looks similar to your existing coverage, consider taking a second opinion. 
• Make checks payable to the insurance company: If you are paying premiums by money order or check, make sure it is payable to the insurance carrier, not the agent. 

What are the consequences of insurance fraud?

The consequences of committing a life insurance fraud can vary based on the severity of fraud committed. Repercussions may include: 

• Price increase or coverage denial: Lying on your life insurance application may seem harmless, but doing so can result in paying higher premiums or having a declined application. 
• Canceled claims: If you pass within the plan’s contestability period and the insurer discovers you lied on the application form, it can refuse to pay the death benefit to your beneficiaries. 
• Criminal prosecution: If you commit a severe fraud, like forging someone else’s signature or faking your death, you could face criminal charges. 

What should you do if you are the victim of insurance fraud?

If you suspect fraud, contact your insurance company immediately. You should also contact the Insurance Bureau of Canada (IBC) or the Canadian Anti-Fraud Center. If you live in Ontario, you can contact the Complaints and investigations department of the Registered Insurance Brokers of Ontario (RIBO). 

• You can contact IBC by filling their online form or by calling 1-877-IBC-TIPS
• You can get in touch with the Canadian Anti-Fraud Center by sending an email at info@antifraudcentre.ca or calling 1-888-495-8501
• Ontario residents can contact RIBO at 1-800-265-3097 or 416-365-1900 

At Dundas Life, we are a licensed life insurance brokerage proudly serving 1000s of Canadian families. Our advisors go through rigorous training to ensure they offer the highest quality service. If you're looking to protect your family, reach out to a Dundas Life licensed advisor today.

Frequently Asked Questions (FAQs)

Is making a mistake on my insurance application fraud?

The answer is, it depends on the type of mistake you make. For example, mistakenly reporting your weight a little lower than it actually is is not fraud. But lying about your smoking habits is.

If the insurer finds out you lied during the underwriting stage, they may raise your premium rate or adjust the coverage (e.g. by adding exclusion or approving you for a lower death benefit). In the worst-case scenario, the insurer may refuse to write you a policy. 

It is worth noting that life insurance policies come with a two-year contestability period. If you pass away during this period, the insurer can contest and deny the claim if they find out that you lied or withheld key information on your application. 

Generally speaking, any mistake made on the application form that impacts your insurability — e.g. lying about tobacco and drug use, a dangerous hobby, or familial medical history — can be considered fraud. 

What does a life insurance scammer look for before scamming people?

Life insurance scammers prey on many types of people. They will, for example, contact someone who has been recently widowed and claim that their deceased partner had taken out a life insurance plan that will issue a tax-free lump-sum benefit. However, since the policyholder had not paid the last few premiums, they must first make up for the premium shortfall.

Fraudsters can also target existing policy owners. For example, an unscrupulous agent may use false statements or misrepresentations to convince a client to drop their existing coverage in favor of similar benefits from a different carrier.

The policyholder will not benefit in any meaningful way from switching providers, but the agent will earn a sizable commission.