How to Spot and Avoid Life Insurance Scams

In this article...
  • The modern insurance market suffers its share of scams and confidence schemes. Awareness is crucial in spotting common life insurance scams and avoiding them.

With any kind of product or service, buying into it can involve the risk of running into dishonest actors who can't or won't deliver what they promise, or who are running other kinds of scams. The results of such scams can be both personally and financially devastating, and customers in the life insurance market need to be informed to be able to spot and avoid them. Here, we discuss some of the most common types of life insurance scams.

Twisting and Churning Scams: Deceptive Policy Upgrades

This kind of scam depends on annuity-based life insurance. Primarily used to guarantee an income stream for retirees, they feature an accumulation phase where the investor pays into the plan, and eventually starts providing period payments to the recipient in either fixed or variable amounts. In the latter case, the payments are higher or lower depending on how well the investments of the annuity fund are doing.

Two ways that annuity-based insurance can be manipulated to a scammer's advantage are through twisting and churning. They're both based on confusing consumers with effectively useless so-called (from the policyholder's vantage point) policy upgrades.

How Twisting Works

Twisting is designed to lure policyholders into buying larger policies. Often, agents engaged in twisting will falsely overstate the target's net worth in order to line their own pockets using hidden charges and premiums on the new, more expensive policy. The victim is stuck with unexpected new restrictions, a time reset on their cash-out terms and little else in the way of real benefit.

How Churning Works

A variant on the twisting gambit is churning. It, too, is a means of upselling the target to a more expensive annuity, using an immediate cash bonus as the incentive. Like twisting, the new policy upgrade resets the policyholder's time-to-payout for their policy (often 10-15 years) and otherwise functions mainly to provide a commission for the scammer.

How to Avoid Them

Be sure to ask detailed questions about proposed policy upgrades, including what concrete benefits they provide, what new charges or restrictions may be involved, whether they reset your time window for the policy's payout and whether there's any potential conflict of interest for the agent selling them to you.

The Fake Beneficiary Scam: Life Insurance Fraud

Some scams involve straightforward fraud. One common example is the fake beneficiary scam, in which the target is contacted and informed that they're supposedly the beneficiary of someone else's life insurance policy, an inheritance coming from someone with the same surname as they have.

The inheritance in these cases doesn't exist. The scammer relies on the target assuming they have a distant relative they didn't know about. If they don't think it through, the scammer will then try to get them to pay out seemingly small sums of money by comparison with the fictional inheritance, with administrative fees and tax costs being the usual devices. By the time they pay this money out and work out that the supposed benefits are never going to materialize, the scammer is long gone.

How to Avoid It

Take time to verify the specifics. Scammers sometimes use an official-looking letterhead or take a slightly altered form of a legitimate company's name. Contact the company in question to make sure it exists and actually has a record of the supposed policy. Never send money to anyone for any kind of administrative or tax costs without doing your research to make sure the transaction is legitimate.

Outright Theft: Fake and Ghost Brokers

A certain class of life insurance scam is more straightforward. They involve fake companies that try to leverage money or information out of their targets without ever providing the promised services.

The Ghost Broker

Ghost brokers are the most basic form of this. These are entities pretending to be insurance brokers who take money upfront for their services, provide supposed proof of insurance and then simply vanish.

Sometimes, the so-called proof documents are forged. In other cases, the documents themselves are genuine, but after receiving payment, the ghost broker simply cancels the policy behind the customer's back. Victims of ghost brokers often only find out they've been deceived when the time comes to cash in the policy and neither policy nor broker can be found.

The Fake Broker

Other kinds of fake brokers can be a bit different from the ghost broker, who often asks for a large amount of money up front. The ghost broker typically operates entirely online, but the fake broker will often have a fixed office address and present the appearance of doing at least some legitimate business.

These scams can be more subtle: The fake broker charges a broker's fee for their services and entices the target with very low premiums. The premiums are low because they introduce errors in the insurance documentation that misrepresent the insured and render their policies invalid. Much as with the ghost broker, the fake broker's deceit is often discovered too late.

How to Avoid Them

Fake or ghost brokers will often request unusual forms of payment, such as payment in cash or by electronic or wire transfer. This, and indeed the fact of their asking for payment up front at all, should be a warning sign. Premiums that seem too good to be true are another red flag. Only buy life insurance from companies that have credentials you can confirm independently with your state's insurance department.

Life Insurance Scams: Is Life Insurance Even Worth It?

Given the variety of scams it's possible to encounter, some consumers may find themselves wondering if life insurance is even worth all the hassle. The short answer is yes, it is: Approached with the right amount of caution, life insurance can be a reliable way of securing your posterity and your family's peace of mind. It's simply important to be aware of the risks. The National Association of Insurance Commissioners (NAIC) provides plenty of useful resources.

Is Selling Life Insurance a Pyramid Scheme?

Some insurance sellers operate as Multi-Level Marketing companies. These are not the same as pyramid schemes, which are illegal, but if you prefer not to deal with that model, it's possible to find brokers that don't use it.

Does Life Insurance Really Pay Out?

Payouts aren't automatic: Beneficiaries need to submit a request. The majority of life insurance policies do indeed pay out, however, and can provide a crucial income source after the death of a loved one.