Targets come in many types. Some have target goals to reach for the accolades it may bring. Investment funds may have a target allocation of assets to maximize its objectives. Other targets could be places a person may want to visit because of their desirable location or the availability of certain amenities. A potential victim may also be considered a target because of characteristics which make the target attractive to the would-be perpetrator. When it comes to crimes, victims can become targets because they are vulnerable in some manner which makes either perpetrating the crime easy (the path of least resistance), or the chances of getting caught are low compared to the reward if successful.
Life Insurance as a Target for Crime
The life insurance industry offers a unique opportunity for the would-be criminal because of several factors that make life insurance crimes attractive, especially to organized crime groups. As a friend used to ask me years ago: "why would someone ever attempt to rob a bank and risk going to jail when someone can take out a life insurance policy?" And if you get caught, chances are you will get your money back. Human behavior is driven by the trade-offs of risk and rewards, and in this instance, the criminal gets high rewards and low risk. This has led to the life insurance industry to become a target for crimes because, among other reasons, the perpetrator has a great deal to gain and very little to lose. This article explores why life insurance crimes are an attractive, virtually no-lose proposition.
Why is there Life Insurance Fraud?
Consider this: an investment advisor approaches you with an investment that requires no more than a $500 up-front fee and $1,500 per year for five years. The total outlay is $8,000. For that outlay, the investment had a high probability of returning $750,000 – a whopping 9,275% return on investment (ROI), or an annualized ROI of 148%. And the best part: if the investment failed to deliver, you are assured that the chances of getting your initial investment back is 99.5%.
It sounds too good to be true, but this is why life insurance fraud becomes very attractive. According to data from the American Council of Life Insurers, less than one half of one percent of death claims filed are disputed. Rarely are perpetrators caught much less prosecuted criminally. This has not only emboldened organized crime groups, but we have also seen identities of unhealthy people stolen by people in positions of trust such as health care workers, doctors, and even neighbors, for the purpose of impersonating them to profit from their ill health and ultimate death.
How Life Insurance Fraud Works
To understand how this works, consider the following.
For as little as $200 to 500, a criminal can purchase either a completely synthetic identity that has a credit history and score, address, social security number, phone number, email address, etc., or a stolen identity that has been slightly modified to confound medical history checks. If synthetic, the person selling the identity will have fully cultivated the identity such that it is real in the digital world, but it just doesn’t have flesh and bones. Alternatively, one could cultivate their own synthetic identity, steal another person’s identity who is unhealthy or in high-risk activities, or simply tweak one’s own identity by changing the identifiers slightly.
Profiting from Insurance Policies
The next step is to apply for insurance while impersonating the identity of the “insured.” If the application gets rejected, there is no loss other than time. Just try again with slightly different variables or with another company, and keep trying until successful. There are user groups that will teach you how to do this, or simply go online to learn how. Once the policy is issued, pay the annual premiums. I used a hypothetical $1,500 annual premium for $750,000 of coverage. The actual amount will vary depending on the product purchased, the age of the identity used, and the gender of the identity.
The next step is to file a claim. While beyond the scope of this article, it is not difficult to find a body (perhaps a homeless person) and claim it as the insured, particularly with organized crime groups. It is thought that some of the more sophisticated organized crime groups use body brokers to match recently deceased persons with an “insured” with a policy aged beyond the contestable period so a death certificate can be issued in the name of the insured. Admittedly, the perpetrator may have to include the body broker in on the investment return.
The Insurance Company’s Response: Investigate or Pay?
When the claim is filed, the life insurance company has a choice: investigate or pay. If the perpetrator is patient and pays the premiums for a few years, then the odds are very low that the company will investigate. The result: Payday.
If the insurance company does investigate, it may or may not uncover enough evidence to deny the scheme. The ability to investigate is limited after the two-year contestable period and most claims are paid with very little scrutiny after this period. Once the investigation is complete, the insurance company has another decision: pay or deny. If paid, the perpetrator is rewarded. If it is denied, the general practice is to return the premiums paid for the policy. Nothing lost except perhaps the cost of purchasing the identity, and I get my initial investment in premiums back. According to figures from the American Council of Life Insurers, less than one half of one percent of life claims filed get disputed.
Legal Challenges and Organized Crime
Even if the claim is denied, the perpetrator may opt to file suit in hopes of a larger settlement, or if lucky, bad faith damages (if the scheme is done right). Rarely do life insurance companies file suit against the imposter although it can and does happen occasionally. Most legal challenges against perpetrators are made in civil court instead of criminal court. Confounding challenges by an insurance company, it is common amongst the organized crime groups for the beneficiary to use an alias to make it difficult to pin down and even harder to get restitution if the litigation against the perpetrator is successful.
The Growing Threat of Life Insurance Crimes
The preceding narrative is a generalization and there are certainly exceptions. All insurers I know want to pay all legitimate cases without exception. The challenge is identifying the unwarranted, fraudulent cases when they are presented. When a company does push back on fraudulent cases, the criminals will typically follow the path of least resistance and move on to other companies who are less likely to challenge claims.
While our data is anecdotal, it strongly suggests that life insurance crimes have increased in recent years, and likely for many reasons including the ease of perpetrating the crime, the low risk in unsuccessful attempts, the high rewards, and the readily available information on how to conduct such crimes. If you would like more information on these crimes and how to mitigate the risks, contact me at Diligence International Group, LLC.
Kevin C. Glasgow, FLMI, FLHC, CLU®, CFE
