According to the National Association of Insurance Commissioners, people commit $74.7 billion in life insurance fraud each year, often to get a lower premium or money they are not entitled to.

What is life insurance fraud, exactly?

There are several types of life insurance fraud, and in some cases, applicants and policyholders are unaware that they are committing it.

Lying on your application

When you apply for life insurance, you will be asked questions about your health, smoking status, lifestyle, hobbies, and income. This information is used by the insurer to determine how "risky" you are to cover and to determine your premium, which is the amount of money you'll pay to keep your coverage active.

The goal is to be as open and honest as possible. If you knowingly lie or omit information on your application, you are committing "material misrepresentation," a type of fraud. Now, forgetting your uncle had high cholesterol isn't always considered fraud. However, if you claim you've never smoked cigarettes but have respiratory problems as a result of smoking, that qualifies.

The insurer will almost certainly find out as well. The best life insurance companies use third-party records during the underwriting process to ensure that what you're saying is true. These could include:

• Prescription medication records from the past five to seven years.
• Driving record listing major traffic violations.
• Report from MIB, formerly known as the Medical Information Bureau, which contains information from past life insurance applications.
• Credit history to check for bankruptcies.

Some policies also necessitate a medical exam, which will reveal your weight, nicotine use, and other health concerns.

Filing a false claim

This isn't limited to Hollywood: there have been cases of people faking their own death or the death of a loved one in order to collect a life insurance payout.

A different type of claims fraud occurs when a life insurance beneficiary murders a policyholder in order to receive the payout. According to the National Insurance Crime Bureau, if life insurance is purchased shortly before the policyholder dies, investigators may look into whether the beneficiary sought to profit from the death.

Forging changes to someone else’s policy

According to Russell Anderson, certified fraud examiner and head of financial crimes services for LIMRA, a life insurance trade group, forgery falls under the umbrella of identity theft or account takeover fraud.

"This is where one person impersonates another with the intent of accessing their [life insurance policies] to steal some of their data, but most likely not to access and steal the cash value in those accounts," Anderson explains.

According to LIMRA, the main culprits are family members, friends, caregivers, and people who have a relationship with the policyholder.

There have also been instances where a third party pretended to be the policyholder in order to change the beneficiaries or policy ownership without the policyholder's consent. In 2017, for example, Pennsylvania regulators fined a funeral director for forging a client's signature on a document naming his business as the beneficiary of her policy.

The elderly and vulnerable adults are prime targets. According to a recent survey, 43% of LIMRA member companies expect an increase in account takeover fraud from related parties, such as family members, between 2020 and 2021. According to the same survey, approximately 34% of insurers reported an increase in third-party account takeover fraud by unknown fraudsters.

The consequences of life insurance fraud aren't pretty

The consequences of committing life insurance fraud vary depending on the severity of the case, with criminal charges being the most severe.

If insurers discover you lied on your application, they may reject it or raise your rate.

If you die during the contestability period, which is within two years of the policy's effective date, insurers may delay payment while they investigate. They also have the authority to deny or reduce the payout to your beneficiaries if you withheld critical information about your health — even if you died for unrelated reasons.

Avoiding and reporting life insurance fraud

If you believe you have been a victim of insurance fraud, call the National Insurance Crime Bureau at 800-TEL-NICB or file a report online at NICB.org.

Most states have an insurance fraud bureau as well, and Anderson advises contacting your bank if you suspect your identity has been stolen.

To ensure that you are not being deceptive, whether intentionally or unintentionally:

• Be truthful in your life insurance application. This is the best way to ensure that your loved ones receive the payout.
• Use a licensed agent or broker. These experts can guide you through the application process.
• Allow no one to sign you up for your insurer's online portal on your behalf. Many insurers provide policyholders with the ability to manage their coverage online. Anderson emphasizes the importance of enabling security features such as multi factor authentication.
• Examine your beneficiaries. If you've had a life change, such as getting married, you should update them.