Finding Fraud: How to Spot Insurance Scams

Deciding when or where you’re going to invest in insurance is a very important decision in life.
It is a tremendous financial turning point where you’re making decisions in entrusting your hard-earned savings through insurance providers that can accommodate your needs. This type of decision is especially difficult to make when struggles such as old age, sickness, or injuries are more likely to occur. Financially investing in life insurance providers is important as you can only do so much in preparing for the future since diseases or accidents can never really be forecasted.

Unfortunately, life insurance as a business entails opportunities for some delinquents who commit insurance fraud. According to,

Insurance fraud from the issuer (seller) includes selling policies from non-existent companies, failing to submit premiums and churning policies to create more commissions. Buyer fraud includes exaggerated claims, falsified medical history, post-dated policies, viatical fraud, faked death or kidnapping, murder and much more.”

The specifics of life insurance investments are also complex. With many providers such as State Farm Group, facilitating for different plans for definite needs ranges from handling insurance on cancers, obesity, mental health and even issues on divorce. Such complexities can come by, especially when scammers begin to set their sights on a big fish.

Types of Fraud

Insurance fraud comes in two main categories: seller fraud and buyer fraud. Seller fraud occurs when the seller of a policy hijacks the usual process in a way that maximizes his or her profit. Buyer Fraud occurs when the buyer bends the process to obtain more coverage, or claim more cash, than he or she is rightly entitled to.

Investopedia added, “Insurance fraud is basically an attempt to exploit an insurance contract. Insurance is meant to protect against risks. It isn’t meant to be a tool to enrich the insured. Although insurance fraud by the policy issuer still occurs, the majority of cases have to do with the policyholder attempting to receive more money by exaggerating a claim. More sensational instances such as faking one’s own death or killing someone for the insurance money are comparatively rare.

With a lot of factors and guidelines to consider, you may never be completely safe from different insurance fraud (and any financial investment fraud for that matter!). Here are some early warning signs to help you spot a potential fraud:

Types of Seller Fraud

Seller Fraud involves those deals that providers make which exploits policy contracts, benefiting the seller while mainly harming the buyer. There are many variations of seller fraud, but they all center on these four basic types:

Ghost Companies

Ghost companies or ghost brokers are fraudsters who sell apparently cheap insurance deals but issue policies that aren’t worth the paper they’re written on. In this scenario, policies are issued and premiums accepted from policyholders, but the company underwriting the policy isn’t legitimate and often doesn’t exist.

Put simply, ghost companies operate in two ways:

1.) Policies are bought from legitimate insurance companies using false information and then doctored before being sold to the unsuspecting client.

2.) Fake policy documents designed to look like they have been issued by legitimate insurance companies are created and sold to customers.

These downright illegal scams can easily be considered a type of boiler room operation, where a team of high-pressure scam artists dial likely victims to sell them false policies. The problem with this is (and unfortunate as it could get) that the fraud isn’t usually discovered until someone tries to file a claim on the policy that their family member thought was in effect.

Premium Theft

Premium theft is when the insurance representative takes the premium for a policy, but doesn’t use for its intended use, rendering the expected policy to be invalid. In essence, the agent simply takes the money for himself or herself.

Fortunately for most people, premium theft has become less of an issue as more companies have moved towards direct deposit models. Then again, premium theft is still possible in some cases especially when a deal provides for suspicious and highly-broken down payment policies.


Churning basically refers to a situation where the insurance representative strongly advises the customer to either cancel, renew and/or open new policies in a way that is beneficial to him or her, instead of beneficial to the client.

This type of insurance fraud often targets customers who are easily driven by the agent’s passion. As such, the agent gets a client to sign up for more policies, thus more premium. In turn, the fraudster gets larger commissions.

According to Money & Career, “For conservative, long-term investors, it is considered general wisdom that buy and hold strategies are the best way to go. So, if you are receiving confirmations once or twice a week, or 10 or more times per month, this may be a warning sign that your broker is excessively trading your account.”

Over or Under Coverage

Similar to churning, over- or under-coverage scams happen when an insurance representative tries to convince customers to buy coverage they don’t need, or sells a lesser policy and represents it as a complete policy.

This type of fraud can easily happen in other business, and the best thing about it (for the scammers) is that it doesn’t look like a scam. However, you should understand that the insurance rep is essentially trying to maximize his commissions, as well as to ensure the sale rather than focusing on meeting the client’s needs.

Types of Buyer Fraud

Much like Seller Fraud, Buyer Fraud also comes in a number of ways, but the overall theme is buyer dishonesty, “allowing” the fraudster to prematurely the supposed benefits from the policy:


Post-Dated Life Insurance

Post-dated life insurance is a type of insurance fraud wherein a policy was created after supposedly insured’s death. The fraudster makes it as if the policy has been in effect well before the passing of the documented insured, thus, resulting to claim from the company.

This kind of scam is often carried out by delinquents with the help of a charismatic insurance agent. Since record-keeping nowadays have been more rigorous than before, post-dated life insurance fraud is fortunately easier to detect.

False Medical History

This one is by the textbook. Falsifying medical history is one of the most common types and essentially the easiest type of insurance fraud. By omitting tiny details, such as a medical condition or a smoking habit, the buyer hopes to get the insurance policy at a cheaper deal than he or she would have gotten otherwise.

Lack of Insurable Interest

Some people are willing to do passively but chaotically dark deeds just to make a better deal. It is true that there are buyers who insure people they shouldn’t be insuring, in hopes that they will die. This constitutes fraud.

Faking Death or Disability

Many life insurance policies have riders for disability, and this is a good opportunity for scammers to prematurely get the payout. However, some people take it a step further and fake their own deaths! In both cases, the fraudster has to deal with the possibility of being discovered through an investigation.

As the old saying goes, insurance is a business that is built on risk analysis and probabilities. This makes every instance of insurance fraud very detrimental to the enterprise, whether it is from the seller or the buyer. For this reason, companies are forced to build contingency funds to protect them against fraud and any other unforeseen events.

While security is good from the client investor’s perspective, personal life insurance premiums tend to be higher. At the end of the day, it all boils down to both parties being honest as well as both parties being vigilant in spotting dishonest activities.