Over the last five years or so, a study has been conducted to determine how insurance companies ensured that beneficiaries of life insurance policies were notified that a relative with a life insurance policy had died.
The study was initiated by California Comptroller John Chiang, who used a Connecticut auditing firm to examine the payment practices of 21 life insurance companies nationwide. The Controller’s investigation “has revealed an industry-wide practice of companies both failing to pay death benefits to the beneficiaries of life insurance policies and ignoring their legal duty to turn the money over to the State for safe keeping. Instead, companies would draw-down the policies’ cash reserves in order to continue collecting premium payments from the deceased. Once the cash reserves were depleted, the company would cancel the policy. Past audits also found that insurers did not routinely cross-check the owners of dormant accounts with government databases listing the deceased. In other cases, companies had direct knowledge of the policy owner’s death, but still did not notify the beneficiaries.”
When questionable practices were uncovered, lawsuits ensued. The premise of one of the latest was that insurers used the Social Security Death Master File to determine whether those insured who had living benefit riders to annuities had died and, if so, they acted promptly to stop payments. However, the Death Master File and other means weren’t used as often to ensure that beneficiaries of life insurance policies were promptly notified that a relative with a life insurance policy had died, and the funds from that policy paid out.
In the case of one recent lawsuit, the lead plaintiff claimed that he was notified only in 2010, four years after the death of the insured, and then only by the state of Illinois Treasurer’s Office…not by the insurance company. He received only a small sum, and it wasn’t until June 2012 that a larger sum was paid, without a good explanation.
Earlier this month (June 2013), Mr. Chiang reached a settlement on behalf of the state of California and its residents with 11 insurance companies who had been found to have underpaid life insurance benefits. The agreements he reached required the 11 companies to do the following:
- Restore the full value of all impacted accounts dating back to 1995;
- Fully comply with California’s unclaimed property laws and cooperate with the Controller’s efforts to reunite these death benefits, annuity contracts and retained asset accounts with their owners or, in many cases, the owners’ heirs;
- Pay the policy beneficiaries 3% compounded interest on the value of the held amounts from 1995, or from the date of the owner’s death, whichever is later.
If the benefits are not paid to the heirs within a specified period of time, the law requires businesses to send the list of abandoned property to the state. In California, the period of time is three years; it varies by state. In many states, this has become a large source of revenue. However, the states’ first goal is to return the money to its rightful owners.
Many other states have followed California’s lead, filed suits against the major insurance companies, and will also benefit from California’s settlement with those 11 companies.
To learn more about beneficiaries and estate related topics, go to www.diesmart.com.