Questionable Life Insurance Claims Practices Cost Consumers
When an insured dies while the beneficiary holds the life insurance policy, the policy information is easily available. Policies have a Declaration page which states the policy number, insured, and the death benefit. With this information the beneficiary can file a claim with a forward understanding of the benefits they are filing for. However if this policy information is not known, the beneficiary relies on the insurer for the accurate calculation of the claim.
Suppose for a moment that the insured never informed the beneficiary they had a policy. They die. No claim is made. What happens?
When a life insurance policy is unclaimed by beneficiaries the insurance company may mistakenly cancel the policy for lack of premium payments. Another possible consequence of a lack of premium payments is the insurer may modify the policy so that the death benefit is greatly diminished. Yet another possibility is the insurer may, after many years, turn the policy cash value over to a State Unclaimed Property division.
Any of these three likely scenarios raises the question of accurate reporting by the insurer. A life insurance policy is a contract between the owner (typically the insured) and the insurer. A beneficiary, who as not the policy owner, is not a party to the contract and as such they do not have rights to the actual policy or the contents – they only have rights to the claim.
This poses a conundrum for many people. They learn of a pending claim. They do not have a policy. The insurer will not reveal any policy information. They receive a claim check. How do they know the amount is correct? Was the policy modified prior to the insured’s death or after? Was the policy cashed-out after the insured died?
Mona in California
At first it seemed like winning a small lottery. Mona had received a letter from a major life insurer informing her that her mother, who had died some 13 years ago, had named Mona as the beneficiary of her life insurance policy. The letter instructed Mona to submit a claim form in order to receive the payment. Curious about the policy, and a bit skeptical about the good news, she called the insurer. The customer service representative did confirm that they had a valid claim owed to her. What the rep could not tell Mona was how much the claim was for.
This didn’t set well with Mona so she contacted The Center for Life Insurance Disputes for help.
Mona’s call was one of a dozen or so such calls The Center had received since the Master Death File Settlement was reached between California and 18 large life insurers.
Death Master File Settlement
In 2013 the Comptroller of California sued 18 major life insurers for ignoring death claims. Even though these insurers were using the Master Death File to stop making annuity payments, they were not using the File to identify death claims they owed. The Comptroller and these insurers reached a settlement. The general terms of the settlement were the insurers would pay $2.4 billion in fines and agree to actively seek out beneficiaries of old life insurance policies.(List of insurers: Article).
Common Occurrences Raise Concerns
“The stories we were being told all had common story lines. The insurers told the beneficiaries that they could never locate the policies they were paying claims on,” according to Steve Burgess, a Center associate.
The Center wrote a letter for Mona asking the insurer for a copy of the policy. Three weeks passed with no answer. A phone call to the insurer confirmed they had received the request. Three more weeks passed and still no policy was sent to Mona. But what she did receive didn’t sit well with Mona.
The insurer sent Mona a letter stating that even though they could not locate the policy they knew that her mother only made one monthly premium payment and then let the policy lapse. The effect was a policy that became Reduced Paid Up, which meant a massive reduction in the original death benefit (an amount typically just more than the cash value).
According to the insurer Mona’s payment would be $15.00 plus $1.50 of interest.
“My mom was not the type of person to cancel anything after only one month. The insurer had been so secretive about everything, I knew this couldn’t be the whole story,” said Mona.
Unable to get the insurer to respond, Mona was forced to take legal action against the insurer. The matter is pending in California.
Bill in Louisiana
Bill received a letter very similar to Mona’s. And just like Mona, he was told the insurer had a death claim for him, but they couldn’t find the policy. They mailed Bill a check for $1,600.00 with no explanation. But Bill, and his persistent wife, refused to accept the claim check until after the insurer provided them with the policy. With assistance from The Center and the Louisiana Department of Insurance, Bill received a replacement check, with no explanation, in the amount of $20,000.00.
Ray in Tennessee
Ray’s father died in 1992. In 2013 he received a letter from a life insurer telling him his father had been insured at the time of his death and he was entitled to receive the claim. As with the others, Ray was asked to submit the claim form — which he did. When the insurer lost the claim forms, several times, Ray contacted The Center for help getting the claim paid. In the course of the claim process Ray and The Center for Life Insurance Disputes inquired as to the amount of the claim. Their request, unlike Mona’s and Bill’s, was answered in writing. The letter to Ray said, “We cannot locate the policy in our files. If you have a copy please send it to us for review.”
Two weeks later Ray received a claim check for $730.00, and a letter to the Tennessee Department of Insurance stating, “We paid Ray $750.00 plus interest.”
When asked about this matter, Burgess, at The Center, said, “They said they paid $750.00, but the check was only for $730.00. If this was an isolated event, or a practice by only one insurer we may not be so concerned. But we are seeing the same practice of paying claims without proof of a policy from multiple insurers. There’s something fundamentally wrong with what’s happening. How many more don’t we know about because people are just accepting the insurer’s word?”
This matter is still pending as the claim check did not match the stated death benefit, and the calculation of interest was not in accordance with Tennessee law.
Are there others
The drafters of the Master Death File settlement agreement probably didn’t anticipate the challenge of making sure the claims were fully paid.
Reduced Paid Up as Insurers Justification. How $1,000,000 becomes $13,000
Many of the policies being identified for payment were a type known as whole life insurance. These policies, specifically, have a feature known as reduced paid up. This is essentially where, when an owner stops paying premiums, the policy’s death benefit becomes little more than the cash value. It typically results in a reduction of over ninety percent of the original death benefit. It is a complex but common transition. The caveat though, is that the insured may have died before the policy became reduced paid up, and in that instance, the fully original death benefit is owed.
Chris in California
We can’t find the policy, so we are using a sample policy. The insurer had been acquired by another. Dad died 30 years ago. What was documented was that the original application was for $1million of coverage. The insurer offered $13,000. In what may have been a major clerical tip off, the insurer sent a letter to the beneficiaries stating the death benefit was one million dollars. However, the actual claim check sent to the beneficiaries was $13,000, with the explanation that the policy had become reduced paid up before the insured died. The matter settled out of court for a confidential sum.
Dolores in Pennsylvania
Her husband was murdered in the late 1990’s. In 2010, some twenty years later, the insurer turned over to the State’s Unclaimed Property a check for $50.00. The check was labeled a Claim Payment. It immediately raised a red flag of concern because of the small amount of money being labeled a claim check. It is unheard of for an insurer to offer a policy with $50.00 of life insurance protection. Was it mislabeled when it was turned over to the State? Do State’s Unclaimed Property divisions check for accuracy? Repeated requests to the insurer for a copy of the policy went unanswered. The matter is pending, but because of the insurer’s lack of effort and responsiveness the Attorney General has been notified.
NAIC activity
The National Association of Insurance Commissioners recognizes that universal reform is needed regarding the Death Master File and life insurer’s implementation of efforts to identify beneficiaries. They are currently, as of the writing of this article, developing a model law to address the issue of unclaimed death benefits referred to as the Unclaimed Life Insurance Benefits Act. (Link to NAIC Model)
Will it be explicit enough, and will non-compliance have any significant consequences, for insurers to adhere to the final Act?
In 2013 the life insurance industry was challenged (by CA) for its general practice of identifying annuity holders who had died, so the insurer could stop making monthly payments, but not applying the same effort to identifying deceased policyholders where the insurer would have to pay a claim. The Center for Life Insurance Disputes continues to investigate the accuracy of claim payments. Greater transparency within the industry would make a big difference.
Life insurance claims appeals.