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States Pushing Life Insurers on Unclaimed Death Benefits

Aug 13, 2012 | Parker Waichman LLP

Loopholes that allow a life insurance company to hold money due to beneficiaries until that person notifies the insurer that a policyholder has died are tightening and, according to a Wall Street Journal report, that means more than $1 billion in unclaimed death benefits could be coming to those benefactors.

The newspaper reports that a Florida woman recently received a check for $7,000 from her deceased father’s life insurance company. That check came nearly a decade after his death and long since she inquired to the company about other policies her father may have held with the company.

At that time, she learned that her deceased father had three other life insurance policies but her initial inquiry a decade ago into those policies was ignored. This case highlights an unfortunate loophole that allows life insurance companies to hold onto premiums paid by a policyholder. The companies are not required to pay out benefits to those they’re due until that beneficiary contacts the company. If this contact is never made, the insurance company holds onto the premium payments and if it eventually stops receiving payments, the company can hold onto the money until a person would have reached their 95th birthday, at which time the company is supposed to turn over those monies to a state’s unclaimed funds accounts.

This loophole has sparked the ire of many state governments and those who believe they’re due payments and were not aware that their relative or spouse’s policy required them to contact the company upon their death. They feel the insurance companies are withholding their payments even though they’re most likely aware of a policyholder’s death.

New requirements in the works for life insurance companies in many states would require them to check the Social Security Administration’s Death Master File, which tracks all deaths recorded in the U.S. A life insurance company often checks this database on a regular basis and streamlines it with its own policyholder rolls to see who among their insured have died. Even if they’ve become aware of a death, if they don’t hear from a beneficiary, they won’t bother to make a payment. They will use that knowledge to discontinue any retirement benefits payments it would have made to a policyholder.

New rules would change that and rather than niggle over every possible case, especially with state governments, insurers are entering into settlement agreements to cover funds due to a number of states’ unclaimed property accounts. A multi-state investigation - led by Florida Insurance Commissioner Kevin McCarty - believes life insurance companies likely owe states more than $1 billion in unclaimed benefits.

In New York, a separate investigation into companies operating in that state have also uncovered a similar pattern in which life insurance companies fail to pay beneficiaries who do not inform the company of a policyholder’s death. 

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