One of the most tempting things about life insurance scams is the potentially large payout. Being the beneficiary of an insurance policy can men millions of dollars when the insured person died. Unfortunately, life insurance, which is meant to be a protection for the insured's family, can become a tool in the hands of the unscrupulous. And it does more than just line the pockets of fraudsters; life insurance fraud can also cost you big bucks. Here are 5 common life insurance scams that have costs that emanate through society - and can even cost you personally.
1. Stranger-Owned Life Insurance
One of the biggest scams out there right now is stranger-owned life insurance. This is a scheme in which strangers own a policy on someone's life. However, there are rules about this. Insurance companies will come after you if sell your policy elsewhere - unless you've had it for two years. This is where scammers come in. Scammers offer to provide you the money up front for a life insurance policy, and may even provide you with money to make premium payments for two years. This policy is usually for a large amount of money, perhaps $5 million to $10 million. Often, this money is a loan.
If the insured dies before the two years are up, the family receives the death benefit, and uses some of it to repay the loan for the purchase of the life insurance. If, you, the insured, hasn't died, then you have some options:
- Keep the policy and pay back the loan with interest.
- Sell the policy and repay the loan with the proceeds.
- Transfer the policy to the lender, and pay nothing on the loan.
Hucksters hope that you will take the third option, since that means that the lender ends up the beneficiary. So, even though you don't pay back the loan, the scammer comes out ahead, receiving the big payout when you die. This means that many scammers prefer elderly marks, since they are more likely to die sooner, resulting in better profits. If you pay back the loan, you are out money, and if you sell your policy (or let it revert to the lender), you could make yourself uninsurable in the future.
Some take it to the next level and securitize these types of insurance policies and sell them to the unsuspecting as "no risk" investments. You could end up losing a great deal if you invest in some of these securities.
Among the financial products offered by life insurance companies are annuities. Annuities offer the promise of regular income, once you have paid in. However, new annuities often lock up the payouts for between 10 and 15 years. This is because you are supposed to make regular payments into the annuity, and the money is supposed to grow through investments made by the insurance company. Some unscrupulous agents and scammers may try to get older seniors to replace their current annuities with new annuities - for an immediate cash bonus.
Unfortunately, seniors taking advantage of these offers may find themselves without the bonus, and trapped in a new annuity. This new annuity cannot be accessed for up to 15 years, unless the senior is willing to pay a large fee as a penalty for early withdrawal. Even if the senior does end up with the bonus, it is usually not large enough to counteract the fact that a regular source of income is no inaccessible. This is particular devastating for those over the age of 65 who are relying on annuity income.
Large annuities can mean big commissions for some agents. As a result, some of the unscrupulous engage in a practice known as twisting. Like churning, this type of scam involves annuities. In order to get approval for a larger annuity, the agent may inflate your net worth, making it appear that you can afford a bigger annuity. Any existing, smaller annuities are replaced using this bigger annuity. The new annuity comes with restrictions on when you can receive your payout, and it may come with premiums you need to pay. As a result, you can end up with an unaffordable annuity - and no way to access your money without paying large surrender fees.
4. Bait and Switch
In some cases, you might think that you are getting one type of insurance, only to find that you are buying life insurance. Life insurance commissions are often hefty in comparison with some other types of insurance. And whole life policies can be even more lucrative. As a result, the insurance agent may sell you one type of policy (term life, perhaps), and switch out with a whole life policy. You sign the paperwork without realizing what has happened, and you may suddenly find that you haven't got what you thought you were paying for. On top of that, your premiums may be higher than you expected. One such bait and switch scam was perpetrated in Florida a few years ago when agents told seniors they were getting less expensive health insurance policies and then signing them up (and charging them) for costly life insurance policies that resulted in bigger commissions for the agents.
5. Fake Death
Another common type of life insurance fraud is the fake death. Scammers fake a death to get a payout. This can result in costs for funeral homes, assignment companies and others. These types of scams drive up costs for everyone. Some fraudsters go so far as to forge signatures on death certificates. Some take out policies on "relatives" who really aren't, and then fake their deaths. If you are someone who is thought "dead", it can be difficult to clear your name of insurance fraud, as well as make it more difficult for you to get life insurance in the future. One life insurance scam operation involved an elaborate scheme, including a staged funeral and a coffin containing cow parts.
Bottom line: Before you buy life insurance, or an annuity, make sure you understand what you are getting, and read the fine print. If you already have something that works well for you, resist too-good-to-be-true promises from hucksters more concerned with a fat commission than with helping you make a good financial decision.