5 Ways to Spot a Life Insurance Scam

Life insurance scammers may try to steal your money, personal information, or more.
Last updated Sep 13, 2020 | By Ben Luthi
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Life insurance is an essential part of a financial plan, and it can protect your family when you die. If you’re in the market for a new policy, however, there are some common life insurance scams to watch out for.

Here’s how some of these scams work and how you can avoid them.

5 signs it’s a life insurance scam

In most cases, life insurance scams are perpetrated by people who aren’t licensed life insurance agents — they’re simply cyber criminals looking to steal your information or money. However, there are some instances in which an agent may take advantage of you to make a quick buck. Here are some signs of a possible life insurance scam.

1. You’ve never heard of the provider

There are more than 800 life insurance companies in the U.S., according to the Insurance Information Institute, and it’s unlikely you’ll know them all. But if you’ve never heard of the provider trying to sell you a policy, it’s essential to do your research.

Start by checking with your state’s insurance department to verify that the company is licensed to do business in your state. If it’s not, that’s a clear sign it’s a scam. If it is, run a quick internet search to determine whether it has an online presence.

Some scammers are more sophisticated than others, so even fake companies can have a few online mentions. But if you can’t find much information, it may be a scam. Even if it’s not, it may not be worth doing business with an insurance company with few reviews.

If you were to fill out an application with a fake insurance company, the scammer may steal your identity, which allows them to open credit accounts in your name, file fraudulent tax returns and health insurance claims, and more. And if you pay an initial premium to a scammer, you may never see that money again.

2. They’re offering to sell you a stranger’s policy

Stranger-originated life insurance, sometimes called STOLI for short, involves a situation in which someone finances the premiums of a stranger’s life insurance policy in exchange for being listed as the beneficiary.

For example, let’s say someone in their 60s purchases a large policy, which is funded by a third-party investor they don’t know. The insured lists the investor or a trust that benefits the investor as the beneficiary on the policy, and the insured may even receive a cash payment for the arrangement.

Then when the person dies, the investor receives the death benefit, which is likely much more than the amount they paid.

That may sound like simply a profitable investment, but STOLI policies are illegal in the U.S. because the beneficiary of a life insurance policy must have an insurable interest. In other words, if the death of the insured wouldn’t cause financial loss to the life insurance beneficiary, there’s no insurable interest.

Of course, STOLI policies shouldn’t be confused with viatical settlements or life settlements. With these arrangements, an insured person may legally sell their existing policy to a third party for a one-time cash payment, effectively transferring ownership of the policy.

That said, if someone is trying to set up a STOLI policy with you, get out fast. Even if they’re not trying to scam you, you would be breaking the law, and the insurer may not pay out the death benefit to you if it discovers the illegal arrangement.

3. They want to sell you coverage you don’t need

Life insurance agents may take a few approaches to determine how much life insurance coverage you need. For example, they may use a multiple of your annual income and sell you 10 or 12 times what you earn every year. Or they may use a needs-based approach, which is a more comprehensive approach to determine your family’s actual financial needs in the event of your death.

Either way, it’s important to do your own math to decide how much life insurance coverage you need and whether it matches up with the agent’s estimate.

Of course, just because an agent encourages you to buy more coverage doesn’t always mean they’re trying to scam you. As a former life insurance agent, I found that I have a much different view of how much coverage is necessary than the people I worked with, and I respected that because what the customer wants is ultimately the most important factor.

But if you find that an agent is insisting you buy more coverage despite your protestations, they may simply be trying to score a bigger commission check on the higher premium amount instead of having your best interests in mind.

4. You received a dubious email about your coverage

Phishing scams are one of the most common online scams because they’re so easy to do. A cybercriminal may send you an email or text message about your life insurance coverage and encourage you to share personal information or click on a link or attachment to get more information.

If you click on the link or attachment, however, it may trigger a download of malicious software on your computer, which can track your keystrokes, steal personal information, or even give the attacker full control over your device.

And if you respond to an email asking for personal information and provide it, the scammer can then use it to steal your identity.

If you ever receive an email about your insurance policy — or anything else related to your finances, for that matter — always check the sender’s email address. No matter how authentic the email looks, a scammer won’t be sending the message from a legitimate email address or phone number with the insurance company.

Also, never open an email attachment unless you can verify the sender, and before you click on a link, hover over it with your cursor and check the web address in the bottom left corner of your browser window. If it’s not the insurance company’s website, don’t click on it.

Finally, if you feel any kind of trepidation about an email related to your life insurance policy, call your agent or the insurer’s customer service line to confirm they sent it.

5. They want you to purchase more than you can afford

The primary purpose of life insurance is to protect your loved ones in case you die. However, some types of life insurance carry more features, such as a savings component or an annuity. These policies can be incredibly expensive, and they may be worth considering for an extremely small group of people.

However, when I sold life insurance in college, I was often encouraged to promote these more expensive policies. They not only provided more money for the agency but also offered higher commissions.

Again, these policies can be worth considering for some people, and they may come up in a conversation with your agent. This type of discussion isn’t considered a scam. But if it’s clear that you can’t afford an expensive policy and the agent is still trying to sell it to you, they may be simply trying to score a big commission.

How to protect yourself from life insurance scams

Although we’ve already discussed some ways to protect yourself from specific types of life insurance scams, here are some more steps you can take to safeguard your personal information and money:

  • When in doubt, contact your insurer. If you receive a phone call, letter, email, or text asking for information or money, always contact your insurer to verify that the message is valid.
  • Verify the insurance company and agent. Life insurance agents are required to be licensed in every state they do business in. Check with your state’s insurance department or attorney general’s office to verify that they’re doing business legally.
  • Avoid sharing personal information unless necessary: Buying a life insurance policy requires you to share personal information, including your date of birth, Social Security number, and more. But a legitimate insurer likely won’t ask you for that information again, especially over email. If the method of asking for those details feels off, call the insurer directly.
  • Question changes. If an agent tries to make any changes to your policy after it’s in place, question what they’re doing, especially if it results in you paying more money in the future.
  • Read the fine print. Life insurance contracts can be long, but it’s important to know what you’re getting yourself into and to make sure it’s not a different arrangement than the one you originally agreed to.
  • Don’t be afraid to cancel. Most life insurance policies come with what’s called a free look period, which can be different for each state. This grace period allows you to cancel your policy and get a full refund of the amount you’ve paid. After your policy is officially in force, review the documents again, and don’t be afraid to cancel if something is off.

The final word on life insurance scams

Having life insurance coverage is important, but it’s crucial you remain vigilant about avoiding insurance scams. Safeguard your personal information, and ensure that you’re working with the best life insurance companies.

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