Life insurance companies are bracing themselves for a tough time
in Tallahassee, Fla., on May 19. Insurance Commissioner Kevin
McCarty has ordered MetLife and Nationwide to appear at the state
capital to justify what some critics are calling an industrywide
epidemic of willful blindness: Failing to attempt to find
beneficiaries of policies.
MetLife and Nationwide are the first to be subpoenaed but
unlikely to be the last. And
life insurance companies
also face challenges from other states, notably California, where
Manulife's John Hancock life insurance unit has agreed to pay $20
million to resolve what is becoming a huge headache for the $5
Proving that life insurance companies did something
will be difficult, because they have the law -- and tradition -- on
their side. When someone dies, it is the responsibility of
beneficiaries to claim the money in a policy. The insurer is
supposed to help, but is not required to seek out
The 'Death Master' list
money isn't claimed it is supposed to be put into an account that
is eventually "escheated," or turned over to the state, unless the
beneficiary makes a claim. The assets in the state pool are
available should the beneficiary ever find out the money is
But here's where it gets sticky. A Social Security
Administration database called "
" is activated when someone dies, and it can provide insurers with
specific knowledge about the deceased, such as Social Security
number, birth date and last known address.
Insurers use this database to identify clients who have died,
clients: those with annuities. Since annuity payments from insurers
stop when a client dies, saving the insurer money, most use Death
Master for this purpose.
I'm ignoring you
In contrast, the state of Florida says that insurers turn a
blind eye to Death Master when it comes to life insurance policies
because they want to delay payments. By willfully not determining
that someone has died, life insurers can draw down the cash value
in a permanent life policy to pay the annual premiums until it's
gone, at which point the policy is canceled.
Ignoring the death of a
policyholder also pays off for insurers - they can continue to
collect interest on the money until someone claims it -- say
"To use the knowledge of death to discontinue policies but not
use the same knowledge to pay death benefits … may be a violation
of statute," says Jack McDermott, director of communications for
Florida's insurance department.
There's an additional upside to ignoring customers' deaths.
Knowing about the death of a policyholder might obligate the
insurer to do a costly search for the beneficiary, whose name is on
the policy, requiring the services of an entire department. The
onus is now largely on the beneficiary, who may often be in the
dark about whether a policy even exists.
Life insurance companies respond
Insurance companies deny that they are knowingly withholding
payments to both beneficiaries and the states.
"These allegations are unfounded and contrary to life insurance
companies' longstanding business practices," says Whit Cornman, a
spokesperson for the American Council of Life Insurers (ACLI), an
industry trade group. Cornman won't elaborate because of the
upcoming hearing, and insurers didn't return calls seeking
Florida and California, which is holding a similar hearing on
May 23, say they have evidence to the contrary, however.
"One red flag is the lack of money that the industry as a whole
is escheating to the states for unclaimed life insurance proceeds,"
A new ally
States have a new ally in their fight: a privately held company
called Verus Financial is working with state agencies to audit
companies for "escheatable funds." Verus didn't comment. Its
president is a former FBI special agent and two of its executive
committee members were formerly with American International Group
(AIG), the world's largest insurer until it collapsed and took a
Verus has sparked an effort by states to claim funds from life
insurers for themselves and beneficiaries, an investigation that
now includes 35 states. And according to
Wall Street Journal
, a 10-state group of regulators at the National Association of
Insurance Commissioners also is looking into the matter.
How much money is up for grabs from insurers? It depends whom
The ACLI says insurers pay out about $162 million a day for life
insurance policy benefits, but insurers privately admit that some
of what should be paid falls through the cracks.
Michael Hartmann, founder of FindYourPolicy.com, a service that
helps beneficiaries find what is owed them, asserts that
"unofficially, over 25 percent of life insurance policies go
unclaimed," citing information he has received from insurance
With this kind of money at stake, insurers have every reason to
anticipate both a lengthy probe and a possible rule change to
require better efforts to find beneficiaries.
"We haven't been targeted yet," says one life insurance
executive who asked not to be identified. "But we assume we'll be
in the next wave."