How to Avoid Life Insurance Scam

Typically, people purchase life insurance to provide financial support for their surviving loved ones. Therefore, it is very important that you choose your life insurance provider carefully and avoid unscrupulous agents. You are less likely to fall victim to an insurance scam if you understand your life insurance needs, the types of insurance, and how to locate reputable insurance agents and companies.

Part 1

Part 1 of 3:

Calculating Your Life Insurance Needs

1
Determine how much life insurance you need. As a general rule, the insurance industry suggests that you carry life insurance in the amount of ten times your annual salary.^{[1]XResearch source} Some factors to consider in calculating your insurance needs are,
- the age of your children
- the amount of your mortgage
- the amount of car payments
- the amount of debt owed by your family
- whether your spouse works
- whether you need to pay for education for your children
- the amount of other sources of income and insurance
- the amount of your dependents’ financial needs
- the amount of life insurance you can afford^{[2]XResearch source}
2
Determine the type of insurance you need. You may want to speak with a reputable insurance agent to discuss which type of insurance works best for you. Generally, there are five types of insurance: term, whole, universal, variable, and universal variable.^{[3]XResearch source}
- Term life insurance provides coverage for a specific amount of time, typically has the lowest premiums, but those premiums will increase as you get older and renew the policy. This policy may be a good choice if you are looking to provide limited protection until your children are grown and able to support themselves.^{[4]XResearch source}
- Whole life insurance covers the insured for the entirety of their life so long as they pay the premiums. You may be able to borrow funds against the accumulated cash value of the policy but this type of insurance typically costs more than term life insurance. This insurance may be best for you if you want coverage for your entire life, you can afford more expensive premiums and you want the ability to withdraw cash value from the policy.^{[5]XResearch source}
- Universal life is similar to whole life in that it has whole life coverage as well as a cash value. However, the investment is tied to current market rates, which may impact the amount of your premium payment. A universal policy may be best for you if you want full life coverage, a guaranteed death benefit and a guaranteed interest amount but also the ability to choose how often you pay your premiums and the amount of your premiums.^{[6]XResearch source}
- Variable life insurance is also tied to investments such as stocks and money markets, which means your premiums as well as your death benefits could be positively or adversely impacted depending on the state of the investment. If you want the flexibility of a universal policy and a guaranteed death benefit but are open to having the cash value of your policy subject to market changes (i.e. the stock market does well so you have a higher cash value or the market does poorly and you have a lower or no cash value) then variable life insurance may be a good choice for you.^{[7]XResearch source}
- Universal variable provides you the payment flexibility of a universal policy but does not provide a guaranteed amount for the death benefit. If you want to control where your premiums are invested and you are not adverse to risking the cash value and death benefit payout of your policy on the fluctuations of the stock market then this may be the right policy for you.^{[8]XResearch source}
After determining the type and amount of life insurance that best suits your needs, you should obtain several quotes to determine the lowest rates and the price range for your life insurance plan. You can search online for life insurance sales websites, you can use an insurance broker or salesperson, or you could purchase a policy directly from the insurance company. Whichever method you choose, you should compare the rates of different policies from a variety of reputable companies and insurance brokers.^{[9]XResearch source}
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Part 2

Part 2 of 3:

Choosing a Reputable Life Insurance Company and/or Agent

Insurance companies are graded on their financial stability by four independent agencies, including Moody’s Investor Services and Standard & Poor. These companies also assess whether an insurance company is vulnerable or secure. You can locate these ratings companies online and search for the ratings of individual insurance companies.^{[10]XResearch source}
Every state has a division of insurance that is meant to protect the rights of consumers and regulate the insurance marketplace. Some states require that insurance companies be licensed for their state, which provides insured some protections if the insurance company collapses.^{[11]XResearch source} When choosing an insurance company, contact your state division of insurance and ask whether the insurance company had any complaints filed against it.
3
Choose a reputable insurance broker. You may feel more comfortable purchasing an insurance policy through a sales agent who works for an insurance company or an insurance broker who helps you assess your insurance needs and choose an insurance policy. When choosing an insurance broker, consider:
- asking family and friends for referrals
- check that the broker is lessened in your state
- check the broker’s credentials
- ask the broker for references
- check with your state division of insurance to see whether any complaints have been lodged against the broker^{[12]XTrustworthy SourceNational Association of Insurance CommissionersRegulatory support organization responsible for setting standards for insurance commissions in the United States.Go to source}
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Part 3

Part 3 of 3:

Identifying Life Insurance Scams

1
Check to see if the insurance company actually exists. One type scam entails creating a fictitious insurance company. An insurance sales person provides you with policies and takes your premiums but there is no actual insurance company. This insurance fraud may not be detected until a family member tries to collect on a policy.^{[13]XResearch source} In order to avoid this type of scam be wary of the following:
- insurance companies with unfamiliar names
- insurance policies that are significantly less in price than comparable policies
- agents who ask you to pay your premiums in cash or by check written out to the agent
- agents who refuse to answer questions or provide only vague answers^{[14]XResearch source}
Some insurance agents will collect your payment but never turn it over to the insurance company. This type of scam is called premium theft. If you insurance company does not use direct deposit, you should occasionally confirm receipt of premium payment directly with the company.^{[15]XResearch source}
Seek a second opinion from a different broker if your agent advises you to change policies, purchase more expensive policies or renew policies that may no longer benefit you. Some unscrupulous agents try to run a “churning scam” by which they convince people to purchase unnecessary policies in order to generate a commission for themselves. By seeking a second opinion before changing policies you can determine whether your agent is giving you sound or questionable financial advice.^{[16]XResearch source}
Similar to churning, some agents will attempt to sell more expensive polices or add in extra provisions that you don’t need in order to boost their commission. You must carefully read all of the details contained in your insurance policy, ask questions about any provisions that you do not understand, and question your broker on why each provision is necessary and what it provides. If your broker is unwilling or unable to answer your questions, you should seek a new broker that will protect your interests.
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Tips

Do not pay insurance premiums through your insurance agent, pay them directly to the company.
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Be wary of insurance promotions that seem to good to be true—be sure to research the broker and the company.
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Do not rely on an agent’s company id as proof of employment or certification. Check the agent’s credentials with the company and your state division of insurance.
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