Publications

By Joe Brady | March 27, 2023

Premium schemes widespread, complex

There are two kinds of death fraud: One is for life insurance money, the other is simply to disappear. The vast array of reasons someone commits these crimes is not so much shocking as it is compelling. The greed and desperation it takes to kill a spouse, deceive a loved one or fleece an insurance company is enormous. Hot off the press, a new report from the Coalition Against Insurance Fraud totals fraud losses at a whopping $308.6 billion across all lines of insurance.¹ Life insurance fraud amounts to $74.7 billion each year.

As these entities are not medical providers, it is difficult for payers to act against them. The examples running through this article largely come from my direct recent experience as the Program Director of the Northeastern Unified Program Integrity Contractor. I have observed that these non-provider schemes are growing in impact and present unique difficulties for payer organizations. On the other hand, these schemes can be identified early and resolved through judicial avenues.

Nor is life insurance fraud new. When the concept of insuring life was hatched on June 18, 1583, in London, schemes to lie, cheat or even fake one’s death soon followed. One of the more-famous schemes occurred in 1933 with a group known as the Murder Trust. These were five men who attempted to take out a life insurance policy on a homeless man named Mike Malloy, and then murder him. It took more than five attempts to successfully see the plan through and collect an insurance check for $800. Through a horrific investigation that included exhuming the body, the Murder Trust was caught and four of them found a seat on the electric chair.²

Many people fake their deaths for large life-insurance payouts. Yet greed is not the only motivator. Avoiding debt or criminal convictions are common. Some even fake their own death to lose the tail of stalkers or dangerous relatives. We hear about workers’ compensation, natural disasters and staged automobile crashes, but life insurance fraud only seems to be addressed in movies where the stories have real shock value. This drama exists to be sure, but so too does the harder-to-notice sides of this illegal behavior. 

In her book “Playing Dead: A Journey Through the World of Death Fraud,” Elizabeth Greenwood indicates that there are several hundred cases a year where people fake their own death.

In 2017, the Coalition conducted a study called Fraud in Life and Disability Insurance of many leading insurance companies to learn more about the size of the problem. The Coalition asked the companies if claims associated with people faking their own deaths was a slight, moderate or severe problem. Dennis Jay, former Executive Director of the Coalition, said that “fake death fell into the moderate category.” “We are seeing a fair number of them,” he said.³

So why is it harder to come by fraud data when reports of health insurance fraud or automotive fraud statistics are readily available? According to Steve Ramban, director of the investigative agency Pallorium Inc.: “It happens more than the insurance carriers are comfortable admitting.⁴” Rambam has investigated hundreds of these kinds of cases over his long career as the insurers hire him to do so. “They don’t want to give anybody ideas,” he adds. In other words, if reports of this kind of fraud became more-public and more-detailed it could inspire copycats to pull off the same kind of scheme. Often insurer special investigation units (SIU) are used for investigation, and quite frequently companies quietly hire just one or two outside investigators who are experts in this specific category. It draws less attention this way.

What we do know is that approximately 20% of life insurance claims are denied during the two-year contestability period; the contestability period is defined as the two years duration starting from the date that the life insurance policy was issued during which the insurance company is permitted to examine the application and confirm that there were no lies, mistakes or material misrepresentations made. The percentage of denied claims is higher if you only account for younger insured claims. Life insurance fraud costs over $70 billion annually. But respondents of an RGA survey indicated that only 1-3% of claims are investigated for fraud or misrepresentation or denied. Only 10% of companies use an algorithm to flag questionable claims.⁵

Common Schemes

Life insurance fraud occurs mainly in four categories: application fraud, death fraud, forgery and phony policies. Understanding them better can bring more awareness to the problem. More awareness can bring more preventative action, and better discovery.

Application fraud occurs when someone knowingly and with intent provides false information to the life insurance company. It is also known as material misrepresentation or concealment. As with other forms of insurance fraud, this tends to be one of the most common. 

Claims fraud is more-dramatic, the type you might see in movies or read about in books. Death fraud, also known as pseudocide, is when someone fakes their own death or the death of a loved one to obtain an insurance policy payout. In these cases, there is generally more than one person involved as you need someone else to stake a claim for the payout. 

More serious is when a beneficiary murders the policyholder to obtain the benefit. Both are rare, but it happens more than you might think. If the killer is caught the benefit goes to a contingent beneficiary or an estate. 

Juvenile life insurance fraud remains a difficult topic to discuss but continues to be a notable problem in the insurance industry, with states such as New York even imposing maximum life insurance limits for juveniles as a countermeasure (N.Y. Ins. Law § 3207(b) (McKinney 2000 & 2005 Supp.).  

Forgery is when someone other than the policyholder, often a family member, gains access to the policy through falsification. This is done to change the ownership, or the beneficiaries of the policy. Believe it or not, most life insurance fraud occurs here. Faking a death or committing a murder is beyond the pale for most but getting the money through patience and misrepresentation seems to be morally tenable for some. 

Obviously only the policyholder can legally make such changes, so forged signatures or other documents are used to misrepresent the holder. Then all one must do is wait for the policyholder to die, which can incite confusion and even anger when the policy is read posthumously. Forgery in all its forms can be very tricky to spot, especially if the scheme involves direct advantage to another family member who had no knowledge of the forgery. 

It is not always family that does this, however. An example from Pennsylvania recounts a funeral director who was caught changing the policy owner and beneficiary information from the original family to the funeral home itself.⁶ ‘Key Person’ life insurance policies can also cause mischief involving non-family members, as payouts are released to a business, as opposed to family of the deceased. 

Phony policy fraud is conducted by insurance agents. They sell a bogus policy to a trusting consumer and simply pocket the premium. As with many other financial swindles, criminals use well-known companies and brands that are trusted and recognized to build confidence. They request direct payments to open the policy and can even collect repeatedly on consumers who believe they have an actual policy. 

Twisting is an insurance scam committed by agents that takes place when the agent pushes a policyholder to drop or convert an existing policy while in turn selling a potentially disadvantageous policy with their company via misrepresentations, again pocketing a commission. 

Life insurance fraud in the post-COVID world

Everyone knows that fraud is not committed only by career criminals. The fraud triangle of incentive, opportunity and perceived risk (rationalization) shows that almost anyone can misrepresent the truth under the right circumstances. Add in the often-justified “victimless insurer” nature of these distortions and you can appreciate the depth of these problems.

Incentive, Opportunity and Risk

The Matrix Experiments⁷ is a famous study series aimed at determining the likelihood of people telling the truth when they did not perceive a real risk of being caught, especially if there was an upside to their participation. 

The study presented people with 20 basic-level math problems. The rub was that there was not enough time to complete them all. When the time ran out, they were asked to shred the original test paper in a provided machine and write down on a separate piece of paper how many problems they solved correctly. Shredding of course means that no one could know the actual number of correct answers any participant actually had. They were awarded $1 for every answer they claimed to have completed correctly. 

The subjects did not know the shredder was a clever ruse. The experiment administrators reviewed the tests and saw exactly how many problems were completed on each exam. Over 40,000 people took part in The Matrix Experiments.⁶

• On average, people solved four problems but reported solving six;
• Almost 70% cheated;
• Only 20 “big cheaters” claimed to have solved all 20 problems, costing the experiment $400;
• More than 28,000 “little cheaters” cost the experiment $50,000.

The COVID-19 pandemic has created an ideal environment for people filling out life insurance applications with “little white lies,” and they can create an enormous rippling economic impact for insurers.

Incentives due to unemployment and other economic hardships are driving motivations. Interest in buying life insurance has risen dramatically due to concerns over the virus’ ability to kill. Before the pandemic, getting life insurance generally involved face-to-face interactions, blood tests and other more-verifiable methods of application authentication. With social-distancing, shutdowns and procedures that have evolved into a contactless purchasing system, insurers have been forced to evaluate the data through less-verifiable methods. As a result, the opportunity to withhold or also forge information on an application has increased, even when it was unintentional.

Further complicating the challenge is the perceived notion by many consumers that the threat of being caught is low; naturally, the risk is lower for people who are only required to self-verify the information they provide. 

Red Flags

A keen eye for detail is required to recognize potential misrepresentations. Underwriters thus play a key role early in the application process. Red flags have a spectrum. Some are obvious, like an ID photo not matching the subject. Other flags are harder to spot.

• Watch for inconsistencies of all kinds. This could be differing signatures from one form to another, physical stats, license numbers, social security numbers, etc.;

• Use of a post office box for an address is an obvious one, but perhaps it was an address to a former employer, friend or address they had years ago. If the premium does not match their apparent means or is being paid by someone else entirely, further analysis is needed. If any financial information cannot be verified more investigation is required;

• Applications with multiple carriers in a short period of time, particularly for large face amounts with an accelerated death benefit. This is especially true if the claimant lives or works in a foreign country for more of the time than they live in America;

• Agent or broker submitting multiple applications for the same person.⁸

Why would a person living or spending more time out of the country than in it be a red flag? When a person dies in the U.S., there are many procedures — from how the body is handled to the investigation of the death to receiving a death certificate. For the most part, faking these elements here is complicated and difficult to pull off. In other countries, however, the process is far-more-simplistic. In many Third World countries for example, “death kits” are available for purchase. They include everything from a staged (and video-recorded) funeral to burial to an actual body and an official death certificate for around $5,000 USD. Medical providers and bureaucrats also can be more-easily bribed to issue false death-related documents.

Consider the case of Hector Mendoza. Originally from the Philippines, Mendoza was an American citizen most of his life and worked for decades in California. In 2001 he hatched an intricate plan to fake his own death. After acquiring the life insurance policies through a few different providers, he arranged his own phony earthly departure with some associates in his home country. 

All he needed then was a tragedy to befall someone else, and he flew to Manila to wait for it. Not long after, a homeless man was stabbed to death in a park after losing a coin-toss game. The body was sent to a local morgue. Upon hearing of the event, Mendoza had his wife in America hop on a plane. Once in the Philippines, she identified the body at the morgue as Mendoza. She planned and held his funeral and even had her picture taken next to “his” casket. The body was cremated immediately following and sent back to the U.S. That night, she had dinner with her husband at a local restaurant.⁹ 

To quote the Reinsurance Group of America⁴, “Trust, but verify! Verify, but validate! Trust your gut, your experience and your training. Ask yourself: Does it make sense? If things don’t quite add up, speak up! Don’t be afraid to ask questions or ask for additional evidence — especially when you see red flags.”

Preventing fraud comes from discovering telltale information and clues early on. Fortunately, we have a wealth of tools to find that information. Most life insurance companies invest in fraud-prevention efforts when they know more about what technologies can help them. Awareness is a key first step, but many tools can help curb these schemes if employed more consistently. 

The internet might seem the most-obvious, but it is also the least-used. Searching google and social platforms are standard, but there is so much more. 

• Obituaries in local newspapers 
• Doctors or other medical specialists the claimant provided
• Hotels
• Accident sites
• Weather conditions
• Short term disability claims data
• Travel documents
• Risk-scoring tools like credit scores or prescription history

Not all fraud is life or death, but with life insurance it can be quite literal. Dramatic cases of pseudocide or murder-for-money plots do happen. Most of the time life insurance fraud occurs in more subtle ways that will require a keen eye to detail in the application process and forgery investigation. Knowing some of the slick methods people use to fly under the radar help bring awareness, which helps bring processes, which helps bring change. If life insurance companies better share information and best practices on this often-un-publicized side of insurance fraud, carriers can continue to evolve their ability to better detect the ever-evolving fraudster.  

---

Endnotes

1. Coalition Against Insurance Fraud. (2022). “The Impact of Insurance Fraud on the U.S. Economy”.

2. Abbott, Karen. “The Man Who Wouldn’t Die” Last modified February 7, 2012.

3.  The Coalition Against Insurance Fraud. April 2017. Coalition_life_disability_report_04-17.pdf

4. [1] Pierce, Emmet. “Playing a risky game: people who fake death for big money” Last modified September 25, 2017.

5. Callaway, Julianne, Derek Kueker, Ryan Barker, Mark Dion, Leigh Allen, Nick Kocisak. “Investigating Life Insurance Fraud and Abuse: Uncovering the Challenges Facing Insurers” Last modified August 21, 2017.

6. Reynolds, Bob. “Funeral Director Charged With Forgery, Fraud” Last modified April 8, 2013.

7. Ariely, Dan, Yael Melamede. “A fascinating experiment into measuring dishonesty” Last modified September 22, 2016.

8. Deforge, Colin M., Dani Storts. “Don’t Ignore Fraud’s Red Flags: The Key to Fighting Fraud is Preventing It” Last modified Dec. 14, 2019.

9. Greenwood, Elizabeth. “Playing Dead: A Journey Through the World of Death Fraud” (New York: Simon & Schuster, 2017), pages 159, 125-126.