This article will discuss the five most common ways fraud is committed on an insurance policy. Insurers inevitably delay or deny claims when fraud is involved, so being aware of potential fraud in advance is good for both the owners of life insurance policies and their beneficiaries.
The 5 Types of Life Insurance Fraud
Fraudulent Beneficiary Change
If a former beneficiary to a life insurance policy contests a change in beneficiary due to fraud, the insurer will delay payment until that allegation is resolved in the courts.
All life insurance except employer-administered group life insurance is governed by state law. For this reason, the law varies somewhat state-to-state, but in general, a beneficiary dispute arises when there is a late-in-life or unexpected beneficiary change by an insured who was under duress or undue influence, or who was not competent to make that decision and was taken advantage of by the new beneficiary.
Unfortunately, it is common for the new beneficiary to be a caregiver, family member, neighbor, or romantic partner who takes advantage of the frail mental state of the insured to get them to change the beneficiary designation to themselves.
Such people may convince the insured to name them as the beneficiary by use of threats, emotional abuse, withholding of sex or affection, or, in the worst cases, even physical abuse.
The former beneficiary will have to show the court that the beneficiary change was fraudulent. This can be done by showing that the insured was incapacitated or incompetent at the time they made the change or that the insured was vulnerable and was taken advantage of by the new beneficiary.
Medical records can be used to show the insured’s vulnerability or incapacity, and eyewitness accounts of the behavior of the insured and the new beneficiary can be used to show the abusive nature of their relationship.
Ultimately the court will look at the evidence and assess the vulnerability of the insured, the new beneficiary’s apparent authority over the insured, what the new beneficiary did to the insured to get them to change beneficiaries, and what the equitable result is. The insurer will not release the death benefits until the court reaches a decision.
Suicide by the Insured
If the insured purchased life insurance knowing they were going to commit suicide, this is insurance fraud, and their beneficiaries’ claims for death benefits will be denied. This is especially true when the insured takes their own life during the first two years after a life insurance policy is purchased, called the contestability period.
If the insured commits suicide after the contestability period expires, the death benefits still may not be paid if suicide is among the exclusions from coverage listed in the policy. This is not fraud, however.
Misrepresentation by the Insured About Health History
In their initial application for insurance and medical questionnaire, an insured must disclose all past and current medical conditions, diseases, surgeries, and medications so that the insurer can assess what its risk is that the insured will die during the policy term.
Insurance applicants with past or current medical conditions pose a greater risk of dying within the policy term, so those applicants will pay higher premiums than applicants without past or current medical conditions.
If in an attempt to save money on premiums, the insured fails to disclose something in their health history, the insurer can deny beneficiaries’ claims due to misrepresentation.
-Misrepresentation About Health During the Contestability Period
During the contestability period, an insurer can and will deny a claim for death benefits for misrepresentation even if the alleged misrepresentation had nothing to do with the cause of death of the insured.
Beneficiaries can often fight a claim denial by offering to settle with the insurer for an amount equal to the death benefit minus the difference between what the insured actually paid in premiums and what they would have paid had the insurer known of the undisclosed medical condition.
-Misrepresentation About Health After the Contestability Period Expires
In most states, after the contestability period expires, the insurer is supposed to deny claims for death benefits only when the insured intended to mislead the insurer by their alleged lie or omission, and the alleged misrepresentation was material to the insured’s cause of death.
In many cases of claim denial under these circumstances, beneficiaries can contest the denial and get it overturned if the insurer cannot prove that the insured had the requisite intent to deceive. For example, when the insurance agent completed the application for the insured and made a mistake or negligently failed to record a medical condition that the insured disclosed, courts have found that the insured had no intent to deceive.
Another example of no showing of intent to deceive is if the insured dies of a condition, they do not know they have.
Another way to overturn a claim denial is to show that the alleged misrepresentation had nothing to do with the cause of death, for example, if the insured failed to disclose that they broke an arm years ago but died of cancer.
Misrepresentation by the Insured about Lifestyle Habits
When completing the initial application for life insurance and the medical questionnaire, the insured is required to disclose lifestyle habits, such as:
- Smoking cigarettes
- Smoking cigars
- Smoking anything else
- Vaping
- Chewing tobacco
- Using alcohol socially
- Abusing alcohol
- Alcohol addiction
- Abusing prescription drugs
- Using illegal drugs or drugs prescribed for someone else
- Drug addiction
- History of driving offenses
- Dangerous hobbies
- Travel to foreign destinations considered dangerous
Again, the insurer requires this information in order to determine the risk that the insured will die during the policy term. People who have any of these lifestyle habits will be at greater risk of dying sooner than people who do not; therefore, they will pay higher premiums.
-Misrepresentation About Lifestyle Habits During the Contestability Period
If an insured try to save money on premiums by failing to disclose any of these lifestyle habits, their beneficiaries’ claims will be denied out of hand during the contestability period. Again, beneficiaries may persuade the insurer to settle for the death benefit minus what the insured should have paid in premiums.
-Misrepresentation About Lifestyle Habits After the Contestability Period
Once the contestability period expires, insurers are supposed to deny claims only when the insured had the intent to deceive, and the alleged misrepresentation was material to the death of the insured.
Courts have found that when an insured disclosed previous drug use or that they skydive as a hobby, but the agent failed to record it on the initial application, there is no intent to deceive on the part of the insured, and the claim for death benefits was paid.
Courts have also found that if the lifestyle habit had nothing to do with the cause of death, for example, if the insured failed to disclose that he chews tobacco and later dies in a car accident, that alleged misrepresentation is not material to the cause of death.
If, on the other hand, the insured dies in a car accident, and they did not disclose their history of speeding tickets, the insurer has a good reason to deny their beneficiaries’ claims. The same may apply if an insured dies while visiting a foreign destination, the insurer categorizes as dangerous and failed to disclose travel on the initial application.
Misrepresentation by the Insured about Personal Information
The height, weight, and age of the insured factors into their risk of dying within the policy term and, therefore, the premiums they will pay. So do the income of the insured and where the insured lives.
After the contestability period, it becomes more difficult for the insurer to argue that the alleged misrepresentation was material to the cause of death. However, if the insured lived in a high-crime area and failed to disclose that, the insurer has a good argument to deny a claim for death benefits if the insured dies as a result of a crime.
If the insured lied about their income and claimed to make more than they do, and later dies from lack of ability to pay for healthcare, again, the insurer has an argument that the misrepresentation is material to the death of the insured.
How to Prevent Life Insurance Fraud
A person applying for life insurance can do several things to minimize the possibility of a claim for death benefits being denied due to fraud. If you are concerned about life insurance fraud, take the following steps:
- Be truthful and complete on your initial application for life insurance;
- Be truthful and complete on your medical questionnaire;
- Contact your insurance company or agent if you plan to travel or engage in activities they consider dangerous;
- Tell your beneficiaries that you have named them as beneficiaries so that if there is a beneficiary change, they will know to suspect fraud.
If you are a life insurance beneficiary and your claim for death benefits was denied due to alleged insurance fraud, contact a life insurance beneficiary attorney immediately. There may be a way to get your claim paid.
