Avoiding Common Life Insurance Scams

Life insurance is not always a cut-and-dry industry. 

Frequently, it is confusing and convoluted, and it can be difficult to tell if the the policy you’ve purchased is the one that will work for you. 

This is probably the main reason we recommend you seek the help of an independent life insurance agent. These individuals will work for you, not a specific company. This means that they do not have loyalty to just one carrier, and are instead able to help you look at a variety of different optioned to suit your needs. 

We know that life insurance is a big decision, one responsible for protecting your loved ones and family. It’s no small commitment either; you are committing yourself to paying a premium for 10, 20 or even 30 years, sometimes for life. Finding the right policy requires financial commitment and faith that your family will be protected. 

But how can you know that you aren’t being scammed? 

Unfortunately, life insurance scams are a very real thing, and they are often targeted toward older individuals, in their fifties and beyond. In this article we are going to examine three of the most common life insurance scams in detail, so that you are armed with the information necessary to protect yourself and your family. 

Scam #1: STOLI

The first life insurance scam we are going to look at is STOLI. No, not the vodka. 

STOLI stands for Stranger-Owned Life Insurance. This refers to allowing another individual – outside of your family – to take out a life insurance policy on you. That description should be enough to raise alarm bells, but unfortunately, this type of life insurance is fairly common. 

Most individuals pedalling this target seniors. This type of life insurance coverage requires that older individuals take out a life insurance policy on themselves and transfer its ownership to individuals with no “insurable interest” in exchange for cash. Upon the policyholder’s death, the investing party gets the death benefit. 

Thankfully, STOLI is illegal in most states, but should you get approached with this scenario, it is a bad idea for many reasons. 

First, the money you receive upon transferring the policy is often less than what the death benefit would be. Secondly, and perhaps most importantly, STOLI doesn’t allow for beneficiaries, meaning that your family and loved ones go unprotected. 

Scam #2: Retirement Annuities

An annuity is a financial product designed to pay out a steady amount of money over time, and a lot of insurers sell them, particularly to individuals nearing the age of retirement. 

The idea behind these annuities is that they can help individuals pay for retirement and their later years. This is especially appealing, as approximately 43% of baby boomers are not on track with saving for their retirement needs. 

Whole life insurance is an example of an annuity. 

Annuities themselves are not scams; in fact, they can be good supplemental tools to help save for retirement, depending on what your current financial needs are. The scam lies in the promise of the cash buildup within the annuity. 

Frequently, these annuities won’t accrue a cash value for over a decade, making them useless for the oft-targeted soon-to-be retirees. Additionally, the fees for removing any money from these annuities prior to the time that they have built a value can be incredibly high. 

A good rule of thumb to tell if you are being sold a scam: if you have already reached, or are nearing, retirement age, you should not be considering an annuity, even if you have not saved enough. 

This is because the money you invest will not grow substantially quickly enough for you to use it to help fund your retirement, and it might actually end up costing you more money in high premiums. 

Scam #3: Selling a policy that is too large

Okay, we’re going to shoot straight from the hip here: agents work on commission. This means that, as with any commission-based job, the more your life insurance agent sells, the moe money he or she makes. For example: if you buy a 20-year term life insurance policy for $1 million, your agent will earn a bigger commission than he or she would on a 5-year term life insurance policy for $250,000.  

Now, before you start thinking that this means you cannot trust any agent, you should know that is not the case. You simply need to know what to look for in an agent. 

For one thing, we recommend an independent agent, as these individuals work for you, rather than one particular insurer. You should also always ask for your agents references – both from coworkers and clients. This way, you can “vet” your agent before working with him or her to ensure that you are working with someone trustworthy. Additionally, you should make sure that your agent isn’t trying to sell you a policy you will never use. 

In some scam cases, a life insurance agent will inflate your net worth in order to sell you a larger policy and to receive a bigger commission in turn. This means that your premiums will be higher. 

Here’s what the premiums for common policy sizes look like:

Life Insurance rates for a 57 year old Male Preferred Non-Smoker (with exam):

Face Amount 10 year 15 year 20 year

$250k $54 $76 $95

$500k $99 $142 $180

$750k $148 $209 $266

$1 million $184 $274 $348

Life Insurance rates for a 57 year old Male Standard Non-Smoker (with exam):

Face Amount 10 year 15 year 20 year

$250k $88 $114 $154

$500k $160 $218 $293

$750k $236 $323 $436

$1 million $299 $406 $568

Life Insurance rates for a 57 year old Female Preferred Non-Smoker (with exam)

Face Amount 10 year 15 year 20 year

$250k $40 $52 $68

$500k $73 $94 $127

$750k $106 $138 $187

$1 million $134 $181 $244

Life Insurance rates for a 57 year old Female Standard Non-Smoker (with exam)

Face Amount 10 year 15 year 20 year

$250k $62 $80 $106

$500k $109 $150 $202

$750k $160 $222 $299

$1 million $204 $278 $377

For the average individual, a policy with a death benefit larger than $1 million is unnecessary, so if your agent starts trying to sell you more you should immediately go seek a second opinion. 

The Foolproof Way to Avoid Life Insurance Scams

There are few ways to ensure that you don’t fall victim to life insurance scams. 

Your first step is to look up your agent via yur state department’s insurance website. This site can provide you with details regarding an agent’s license and any history of complaints filed against him or her. 

You should also use Google, and conduct a little bit of research on any reviews of the agent. 

Probably the most important thing you can do to ensure that you are not scammed is to conduct your own outside life insurance research and to present it to an agent. He or she should take the time to get to know you and your financial needs, and should walk you through each step in the life insurance buying process. 

If you agent isn’t taking the time to explain to you the process of finding your policy, then you should find another agent. If you feel as though you have been involved in a life insurance scam, please visit NAIC.org.