How to Protect Yourself From Insurance Scams

Preplanning your funeral is a great way to spare your family the burden of making your final arrangements, but unfortunately it also provides unsavory service providers with the opportunity to sell you a false bill of goods. The impulse to provide for one’s future and loved ones is noble, but it must be accompanied by due diligence in order to prevent the possibility of fraud. How can you watch out and prevent funeral insurance hucksters from taking advantage of you? Here’s how insurance scams work and what you can do to protect yourself.

Ponzi Schemes

Most funeral insurance scams boil down to some version of a Ponzi scheme. A Ponzi scheme, within the context of investment, is when a broker takes funds promising an extraordinary return on the initial principal, then turns around and uses that money to pay off the promised sum to earlier investors. The scheme requires an accelerating pace of investment to allow juggling the demands of individual investors successfully as more and more portfolios come online. Eventually, the con falls apart as the money coming in fails to meet the total returns promised to early investors.

In funeral insurance, the Ponzi scheme structure translates to fake or illegal operators accepting money now, promising to place it in a fund that will mature to cover the costs of a future funeral, and instead using it to pay current pending claims and cover risky investments. Any extra funds are used for personal enrichment.

Protecting Yourself

What can you do to protect yourself from these sorts of schemes? Here are some easy steps to take to ensure that you’re not being taken in when it comes to funeral insurance.

  • Check with the Better Business Bureau. Make sure to check whether your funeral insurance provider or planner is registered with the Better Business Bureau, along with what rating they received.
  • Find out if your plan is transferable. What happens if you move away from the area where you purchased your plan? Will your plan come with you? Many providers allow clients to transfer their service location, but only after paying an extra fee.
  • Check what happens to the interest you accrue. If you prefund a trust account that accrues interest, make sure to check where that money is being sent.
  • Make sure you’re protected if the firm goes out of business. Don’t lose the money you’ve prepaid for a funeral plan if the insurance company goes under. Make sure that your insurance contract provides for that possibility.

Preplanning your funeral or cremation is a great gift to your loved ones: It spares them the future financial and logistical burden of providing for your end-of-life services. Unfortunately, individuals will try to subvert your plan for their own financial gain. Take care to follow the prescribed steps and guard yourself against funeral insurance fraud. Don’t let a few criminals deter you from making a kind and compassionate decision.