Life insurance is a financial product that offers financial cover to beneficiaries in the event of the policyholder's death. Life insurance can be an excellent way for individuals to protect their loved ones and provide them with financial security, but it's also an avenue for fraudsters to exploit the system. Fraud in life insurance can occur in several ways, which can lead to substantial losses for policyholders and insurance companies.
Fraudulent activities can range from exaggerating the value of a claim to a false claim altogether. Additionally, fraudsters can entice people into signing up for policies with false promises. The insurance industry has taken several strategies to reduce fraud, such as investing in technology and techniques to detect it. In this article, we will discuss the different types of insurance fraud and how to avoid them.
Exaggerating Claims
Exaggerated claims occur when policyholders deliberately inflate the value of a claim, which drives up the cost of premiums for all. For instance, claiming a higher amount of damage or injury, such as claiming that a car accident caused severe, life-changing injuries when only minor injuries occurred.
One of the most common types of exaggeration is inflating a death benefit claim on a face amount life insurance policy. Policyholders may also hide important information or change the facts of the claim to receive higher compensation payouts. Claims can also be inflated by soliciting policies for inflated amounts that exceed the actual financial worth of a person.
Falsifying Information
Falsifying information is another technique that fraudsters use to dupe insurance companies. Policyholders may lie about vital information, such as their health and lifestyle habits, to secure coverage. Falsifying information can affect both the policyholder and beneficiaries as the policy may be invalidated for false statements.
Policyholders may also falsify their death by the act known as 'fake death,' essentially posing as a deceased individual. This way, they can lay low or acquire money from other sources and escape crippling debts.
Staging Accidents
Staging accidents to obtain fraudulent insurance payouts is a common practice among fraudsters. They may fake accidents or injuries to claim compensation payments. This method can also lead to a rise in premium costs, loss of coverage, and criminal prosecution.
Fraudsters may increase the number of crashes or injuries to get higher payments. When a group is involved, the prices are divided among the parties involved, making it more challenging for investigators to find the culprits.
Stranger-Originated Life Insurance
Stranger-Originated Life Insurance (STOLI) is a relatively new type of insurance fraud that minimizes insurable interest and takes advantage of the way insurers charge premiums. In STOLI, an individual who does not have an insurable interest in a person purchases a life policy on another person, typically someone ill, elderly, or someone who is at risk of death.
If the insured continues to live for an extended period, the policy is sold to a speculator to collect a profit. The people who purchase the STOLI policy and the party that sells it to them are involved in fraudulent conduct. STOLI is illegal in all but two states, and some states are taking steps to ban the practice altogether.
Viatical Settlement Fraud
Viatical Settlements are investment opportunities that allow individuals with a life expectancy of two years or less to sell their life insurance policies. Investors purchase these policies at a discount and receive a payout upon the insured's death, receiving a higher return than they would have received from the original premium.
Viatical Settlement Fraud is a scheme that defrauds investors by inducing them to invest in non-existent life insurance policies. Fraudsters make false statements and provide bogus paperwork, duping investors and causing them to lose substantial sums.
Conclusion
In conclusion, life insurance fraud is a common problem that the industry faces, leading to significant financial losses for victims and insurers. It's worth noting that fraud can affect everyone, whether they are individuals, corporations, or insurance companies.
While the insurance industry has implemented several anti-fraud strategies, individuals can also take simple measures to reduce the risk of fraud. Policyholders can shop around for life insurance policy coverage and review policy terms and coverage limits to avoid being scammed.
Ultimately, it rests upon the policyholder to read and understand the terms of a life insurance policy thoroughly. By doing so, an individual puts themselves in a better position to protect themselves and their beneficiaries from fraudulent schemes.