Life Insurance Fraud

Insurance fraud occurs when individuals deceive an insurance company or agent to collect money that they are not entitled to, or when insurers or agents engage in deceptive practices that have negative effects for consumers. Life insurance is a contract between an individual (policy owner), and the insurer, who agrees to pay a sum of money upon the insured individual's death or other event, such as terminal or critical illness. In return, the policy owner agrees to pay a specific amount at regular intervals, called a premium, or in lump sums. The person designated to receive the proceeds from the life insurance policy is called the beneficiary. Life insurance policies are often set up to cover the policyholder's bills and death expenses. In the United States, the most common form of life insurance specifies a lump sum to be paid upon the death of the policy owner. This entry describes life insurance fraud, discusses fraud by individuals as well as by agents and insurers, and ends with information on factors related to life insurance fraud.

Life insurance policies require the beneficiary of a policy to provide due proof of death when making a death benefit claim in support of which the beneficiary must submit a certified copy of the deceased's death certificate. A complete signed copy of the insurer's claim form is also required. Proceeds from life insurance policies may be paid as a lump sum or as an annuity, in which the funds are paid over time in regularly recurring payments for a specified period. If the insured's death is suspicious and the policy payout is large, an investigation of the manner of death will be conducted prior to the claim being paid. When a policyholder disappears without a trace and there is no direct evidence of the manner or fact of the insured's death, the claim may not be honored because so many such claims are fraudulent. In such cases, courts frequently allow the use of circumstantial evidence where the age of the insured would be beyond human expectation, where the insured's health was seriously impaired upon his or her disappearance, where the insured was exposed to danger or peril, and where the insured's absence is unexplained and evidence shows that the insured's character and habits are inconsistent with voluntary absence for the period involved.

Insurance fraud represents a major criminal activity in the United States. Fraudulent life insurance claims, estimated as high as $9.6 billion each year in the United States alone, are cause for the high cost of insurance that is absorbed by the consumer. One study conducted during the late 1990s examined 349 life insurance companies which, at the time, represented more than 93#x0025; of the U.S. life insurance market. The study authors reported that urban areas have higher rates of life insurance fraud and fraudulent claims and these claims are greatest in those regions of the country where people appear to accept such fraud as a way of life, where the unemployment rate is high, and where the economy is less than robust. The extent of existing laws does not appear to be a factor in the prevalence of fraudulent life insurance claims. Income and the existence of fraud penalties and punitive damage laws were not found to be related to the suspected fraud reported for each state. This same study reported that of 7,596 contested life insurance claims, only 43 had fraud listed as the reason for a denial of the claim. However, the majority of other reasons cited can be interpreted as fraudulent.

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