The Florida Office of Insurance Regulation recently asked major life insurance companies to appear at a hearing regarding unpaid benefits. According to the OIR, life insurers have failed to pay at least $1 billion owed to beneficiaries, policyholders or state governments. Florida's regulators, along with regulators from 15 other states, specifically want to know how insurers determine a policyholder has died.
Life insurance companies depend, for the most part, on beneficiaries or family members to claim benefits when an insured dies. If the companies don't know (or don't have proof of death), they don't have to pay. The companies can then collect interest on the unpaid claims.
If an insurer knows of the death but is not contacted by the beneficiary or policyholder, at the end of four months the company must take "reasonable steps" to pay the benefit. Finding the beneficiary takes manpower and money. It is to the insurer's advantage, then, not to conduct an active search for death records.
For annuities, the rule is different. A person holding an annuity receives payment on a regular basis from the investment. If the insurance company does not know of the holder's death, the annuity continues to pay. Not only is the insurer paying funds it doesn't owe, but the company will likely spend time and money on reclaiming the improperly paid benefits. With annuities, then, insurance companies are at a distinct disadvantage if they don't know the holder is deceased.
As a result, insurance companies regularly refer to the Social Security Administration's death list to see if annuitant has died. Regulators want to know if they make the same effort to discover if insurance policyholders have died.
A representative from one of the insurance companies at the hearing testified that their standard practice now is to check the death list at least once a year. The company began checking the list occasionally in 2004; in 2007, it compared most of its policies to the list.
Regulators, led by the Florida OIR, will continue delving into the issue. They expect to form a task force soon to conduct active, coordinated investigations into whether companies have wrongfully or recklessly failed to pay benefits.
Source: Bloomberg, "Insurers may owe more than $1 billion in unpaid policy benefits," Alexis Leondis, 05/19/2011