Insurance Companies Work Death Benefits to Their Own Advantage


Investigators from the New York State Department of Financial Services have determined that life insurers in the state have been holding back more than $52 million in life insurance benefits to the survivors of deceased policy holders — in some cases for as long as 40 years. This practice, however, is not limited to New York.

New York Life Insurance Investigation Reveals Failure to Pay

On Monday, December 5, 2011, New York officials disclosed that the insurance companies in question had not consulted the Social Security Administration’s central database, the so-called “Death Master File,” to determine if policy holders were deceased. When 172 companies were ordered to cross check policies to the death index, the results showed 7,934 outstanding cases. Of those, the oldest was for a policy holder who died in 1970. The largest outstanding payment was $673,485, plus interest. On average, however, the amount owed was $6,994. Department of Financial Services Superintendent Benjamin Lawsky told the press that “this is just the beginning.”

Currently, an additional 950,000 policies are under review, and 27,889 new “old” claims were being processed. Eventually, the amount owed to beneficiaries is expected to reach hundreds of millions. By state law, death benefits are not due until a claim has actually been filed, but the Department maintains that matching policies to the official record of deaths is an essential responsibility many of the insurers have shirked.

While the $52.6 million in overdue benefits paid out is tiny compared to the annual death benefit total of $4.5 billion, beneficiaries are rightfully entitled to the funds and should receive them. This problem, however, is certainly not limited to New York State.

California and Florida Investigate MetLife’s Failure to Pay

In May 2011, the state of California subpoenaed MetLife to testify at a public hearing to explain its procedures for handling unclaimed beneficiary assets. MetLife, the largest life insurance company in the U.S., was one of ten to be investigated in California for failing to pay on life insurance policies. The other companies to fall under scrutiny were The Hartford, Sun Life Financial, Nationwide Insurance, John Hancock Insurance, Prudential, New York Life Insurance Co, Aegon Group, Pacific Life Insurance Co., and Lincoln National Life Insurance Co.

A similar action in Florida forced Met Life to admit that it, too, did not use the Social Security “Death Master” file until 2007, and that it did not begin to consult the database regularly until 2010. The Social Security Administration has been keeping the Death Master file since the late 1980s. When MetLife did consult the government data in 2007, it discovered $51 million in unclaimed assets, and $32 million where no beneficiaries could be located. In that instance, the funds were turned over to the state.

Companies that do use the Master List do so mainly for their own benefit, consulting it assiduously for those clients with annuities. In that scenario, annuity payments cease at the time of death, thereby saving the company money. For regular life insurance policies, however, it would seem the companies turn a blind eye. If the insurer claims not to know the person has died, and payments are not being made, they can draw the value of a permanent life policy down to the final point of cancellation — and continue to collect interest on unclaimed benefit cash.

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There are also many instance in which beneficiaries are difficult to locate. Finding these people can represent a significant expense to the insurer. If no good faith effort is made to do so, the company is not out the cost of the search, can continue to themselves be “beneficiaries” of the amount with interest collected, and can, over time, allow their requirement to pay benefits at all to basically “expire.”

Financial Advisers Counsel Life Insurance Policyholders to Protect Themselves

As these state investigations expand, it is obvious that failure to pay on life insurance policies is an industry-wide issue. Financial advisers are increasingly emphasizing to their clients that it is a mistake to simply assume life insurance payouts will proceed automatically upon their demise. It is important for policy holders to make sure that their beneficiary choices are clearly spelled out in the policy including name, address, and Social Security number.

This information should be reviewed and updated regularly. It is also important to include both primary and contingent beneficiaries. Multiple copies of the policy should be kept in different locations, and there are options for storing digital copies online. Putting papers of this nature in a safe deposit box is actually a bad idea, since the boxes are sealed upon the death of the owner and may be inaccessible for an extended period of time.

Perhaps the most important consideration in making sure rightful benefits are paid from your life insurance policy is simply to communicate clearly with the people who will be tending to your affairs in the event of your death. It is important that these people have the details of the policy, and any relevant passwords. It is a costly mistake to assume the life insurance company will automatically disburse benefits, because clearly, that does not happen.

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