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Waiting For The Dead To Step Forward

As a rule, dead folks are not very diligent about exercising their rights. Some life insurance companies have profited from this tendency for a long time, but their free ride on the backs of policy beneficiaries may be coming to an end.

American International Group Inc. and MetLife Inc. have agreed to pay large settlements to beneficiaries of unclaimed life insurance policies and to change their procedures to help identify policies that might otherwise go unclaimed. Under the settlements, which followed recent state reviews, AIG is expected to pay around $300 million, and MetLife is expected to pay about $500 million.

A life insurance policy is a contractual promise to the policy’s owner that the insurer will pay the designated beneficiary when the insured person dies. Often, the policy owner is the person whose life is insured, which means that, upon death, the owner is not in a position to notify the insurance company that it is time to issue a check. Usually, the beneficiary is aware of the policy and will claim the death benefit, but sometimes a policy’s existence is either unknown or overlooked.

In that situation, insurers do not get to just hold on to the money and wait. States require unclaimed or abandoned property, including insurance benefits, to be turned over to them for safekeeping in the event the rightful owner is later identified. New York state’s unclaimed insurance fund currently holds one uncashed policy worth $1.7 million and others of lesser value.

Once the money is in state hands, it quickly becomes available for other purposes. Anthony Forchino, assistant director at the Arizona Department of Revenue, told The New York Times that the unclaimed benefit money his state collects “goes into a general fund each year until it’s claimed.” That seldom happens. Including the single $1.7 million policy, New York state received over $400 million in unclaimed life insurance property between 2000 and 2011. It only paid out about $65 million.

Joseph M. Belth, professor emeritus of insurance at Indiana University and editor of the Insurance Forum, conducted a study of unclaimed benefits that suggested insurers have at least $1.3 billion in total unclaimed policy liabilities. Around $351 million was transferred to states in 2009, he estimated.

Although insurers must ultimately surrender unclaimed policies, they still get a significant benefit from being less than vigilant in tracking the deaths of customers and in locating beneficiaries. Depending on the state, insurers are allowed to wait until a policy has been inactive for two to seven years before surrendering it. During that time, they are free to profit from the money. Also, since some policies do not require regular premium payments or other actions on the part of policyholders, insurers can continue to consider policies to be active even as the long-out-of-touch insureds achieve remarkable apparent feats of longevity.

Under their settlements, AIG and MetLife have agreed to use the Social Security Administration’s Death Master File to actively identify customers who have died. The database is based on Social Security Administration payment records. It does not contain records of every death, but it should serve as a useful starting point.

All U.S. insurers should regularly monitor the Social Security database. The life insurance business is, fundamentally, built on trust. We buy life insurance so that the people we care about will be financially protected when we are no longer here to look after them. If we lose faith that the insurer will hold up its end of the bargain, an important financial planning tool is compromised. Insurers that place the onus on beneficiaries to step forward are putting their credibility and business reputations at risk.

As soon as a company loses touch with a policy owner, it ought to make every effort to determine whether benefits are due. Investigating possible deaths sooner rather than later will make it far more likely that insurers will be able to locate beneficiaries and far less likely that benefits will end up in the lost-and-found.

While the AIG and MetLife settlements will partly address the issue, individuals should also make a point of ensuring that potential beneficiaries, including secondary beneficiaries, are aware of their policies and have access to records. In situations where beneficiaries might include young children, this requires special planning.

There will still be situations in which beneficiaries are unaware of policies or are unable to file claims. But as regulators force insurers to step up, we can hope that in the future, even when records are lost, benefits won’t be.

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