Last Updated: August 6th, 2023
It doesn’t matter where you have a dollar or a million of them, a credit card or a check, a piggy bank of a pension. If you have money, a crook wants it.
Which explains why there are so many deceptions involving life insurance. For centuries now, con artists have tried to scam life insurance companies out of money — and they’ve tried to scam people using life insurance as a pretext. It’s the latter that I especially worry about.
Scam artists hurt everyone with higher premiums. Some reports say that the insurance industry sees $11.8 billion in fraud a year. Whatever the number, it’s high.
Higher than we’d like premiums, I guess we all have to live with. But when a con artist targets an individual, that individual could see their entire financial portfolio decimated.
So with that in mind, here are some somewhat common life insurance related scams that have been seen in recent years — and as Sergeant Phil Esterhaus used to say on the 1980’s crime drama Hill Street Blues: “Hey, let’s be careful out there.”
SCAM: Pay your insurance company, not your insurance agent.
I’d like to think that most insurance agents are as honest as the day is long (glad I’m not writing this during the dead of winter when it gets dark around dinner time– that cliché wouldn’t come off as well). But as with any industry, you have some bad apples.
In Milwaukee, Wisconsin, a financial advisor (who evidently never was an insurance agent but could sell insurance) is currently looking at the possibility of 20 years in the federal slammer because he started cashing checks that would have gone to life insurance and annuities — but instead, he just pocketed the money.
It is kind of clever. It isn’t as if you buy life insurance, and somebody says, “Here’s your life insurance. Where are you going to put it? Maybe in the kitchen…?”
You don’t see it, and if you’ve been working with someone who seems reputable (this financial advisor had his own radio show), you’re going to be reasonably assured that if you’re paying for life insurance, you have life insurance.
But here’s a good rule of thumb — if you’re paying the insurance company every month, you do have life insurance. If you’re making out the check to Stan your insurance guy, you don’t. Stan is getting rich.
In fact, this advisor conducted honest business for years, but then apparently turned to the dark side — and one of the red flags that his victims apparently didn’t notice was that he asked people to stop writing the checks out to the company, a subsidiary of AIG, but instead — to himself.
SCAM: If a financial advisor advises you to cash out your life insurance policy, be wary.
I’m not saying that there is never a good time to do this because every situation is going to be different. I’m just saying — ask questions, a lot of them. Maybe get a second professional opinion and talk it over with friends and family.
The Bangor Daily News recently reported how an insurance agent out of Lewiston, Maine, allegedly advised a man to give up a $100,000 life insurance policy, which he had been paying premiums on for almost 20 years — the cash value was not quite $12,000.
The advisor apparently suggested his client buy several annuities totaling $46,770. The agent received $4,775 in commissions and apparently cooked the books so his employers wouldn’t realize how sleazy he had been.
And make no mistake; he had been sleazy. The client with the $100,000 life insurance policy was permanently disabled due to a work-related lung condition. In fact, he died a year after he gave up his policy. His wife wasn’t too happy and complained to the state insurance bureau.
Fortunately, there was a bit of a happy ending. The agent lost his license and was ordered to pay a $12,500 fine and the widow is going to receive $160,000. But you need to be careful because many scams don’t have happy endings.
SCAM: You can’t believe everything you read.
This can happen to any respected financial institution, but I’ve heard of it happening with a number of insurance companies.
You get something in the letter from what I’ll call the Super Honest Life Insurance Company with a lucrative deal that simply requires you to transfer a little money to an account — or cash a check for some prize money you’ve won — or all you have to do is call a 1-800 number and give away some of your personal information.
Obviously, plenty of insurance companies advertise through snail mail, and so I’m not saying that you should back away every time you get anything insurance-related in the mail. Just know that some insurance companies have occasionally had their company logos misappropriated for evil and that even though the name might be honest, the letter sending may not be.
SCAM: Beware of the viatical.
This is a legal product, though your stomach may turn once you hear about it, assuming you don’t already know. Regardless, it’s one of those legal products that lends itself well to fraud.
So what is a viatical? It’s a financial product that allows the holder of a policy — called the Viator — to sell his or her interest in it to a buyer for cash. The policyholder gets more than the cash value — but less than the payout.
So then the buyer, wanting to make that cash back, re-sells it to an investor, or maybe a lot of investors.
If the original policyholder dies quickly, everyone makes a lot of money. If the policyholder sticks around a long time, not so much. Maybe nothing.
Six years ago, hundreds of Northern Californians, according to an ABC News report from last year, were victims of a $25 million scam (one guy they mention lost $50,000), only it took a while for everyone to catch on. Everyone had been told that each policy was backed by a bond, and if the insurer failed to die by a certain date, everyone would apparently make a ton of money. But the bond company didn’t exist.
Still, even if you’re dealing with reputable people, I’d give pause to what you’re doing with a viatical. Yes, the original policyholder may be ill and may have needed money, and this was a way for him or her to get it… but it’s still a risky financial proposition for you, and you’re basically reduced to hoping someone dies soon, so you can get a high return on your investment.
Watch Out for Life Insurance Scams
I wish there was some magic formula for keeping con artists away, but there is no hard and fast rule in the world of being conned. As soon as you come up with a rule for keeping crooks at bay, they’ll try to bend that rule.
I can’t even tell you to trust your gut and listen to your inner voice of reason with full confidence — because that’s sometimes part of the problem. Predators prey on our emotions, and that can have a way of distorting our gut instincts and the inner voice of reason. Sometimes con artists have such sway on our inner voice that when we do listen, we’re still caught.
Still, if you’re working with a so-called professional selling you life insurance and you feel pressure, that’s usually a good sign that this is a bad idea.