Insurance industry must get its act together

If it wants to avoid potentially onerous new regulations and a slew of negative headlines, the life insurance industry must band together immediately and establish universally accepted guidelines for identifying deceased policyholders and disbursing benefits to beneficiaries. Regulators are on the warpath against insurers for allegedly being lax in their efforts to pay out life insurance proceeds. California regulators last week said that they will hold a hearing this month to see whether MetLife Inc. failed to contact beneficiaries to pay out life insurance proceeds in cases where it knew a policyholder had died but a claim hadn’t been made.

Meanwhile, regulators in 35 states are investigating whether dozens of insurers, including some of the nation’s biggest, are doing an adequate job of determining whether policyholders have died, and are slow in turning unclaimed funds over to the states, as they are supposed to do.

The consensus among regulators seems to be that many insurers are avoiding disbursements and holding on to the funds for years. In more egregious cases, insurers are paying themselves premiums on the accrued value of the policies that are deemed dormant, regulators contend.

For example, in a case involving a policy issued Feb. 16, 1963, to a person who died April 20, 1999, an audit by California’s controller determined that John Hancock Life Insurance Co. held on to the death benefits and depleted the policyholder’s cash reserves by collecting premiums.

Hancock has denied that it broke any applicable state laws.

Even so, the company recently signed a settlement with California requiring it to be more proactive in identifying deceased policyholders and notifying their beneficiaries. The company also agreed to work with California regulators to disburse $20 million in death benefits and matured annuities to owners and owners’ heirs.

For their part, insurers maintain that beneficiaries are contractually required to make claims when a policyholder dies.

Although that may be true, it ignores the fact that some policyholders fail to inform their beneficiaries of the existence of the insurance policy. It also overlooks the fact that some beneficiaries lose contact with the policyholder and might be completely unaware of the insured’s death.

In the relationship between the insurer, the insured and the beneficiary, only the insurer is assured of knowing about the existence of a policy and the name of its beneficiaries after a policyholder dies. Therefore, it is only fair that insurers be expected to shoulder some responsibility for making sure that death benefits get into the hands of beneficiaries.

Insurers should commit to quarterly reviews of the Social Security Administration’s death master file to determine if policyholders have died. Upon determining that a policyholder has died, insurers then should make a reasonable attempt to notify any and all beneficiaries of the death benefits owed to them, regardless of whether a claim has been filed.

If after a reasonable amount of time — say, three years — no beneficiaries have been found or come forward, the death benefits should be handed over to the appropriate state.

The practice of drawing down on a policyholder’s cash value after a policy has been deemed “inactive” also should be prohibited.

Companies that agree to adhere to the guidelines should report their compliance with the protocol to state regulators.

By and large, insurers take their responsibilities to policyholders and beneficiaries seriously.

In 2009, the latest year for which data are available, the industry paid on average $1.6 billion to policyholders and beneficiaries every day, according to the American Council of Life Insurers.

During that year, $1.3 billion in claims were in dispute, including $904 million in claims filed before 2009. Of this amount, $114 million was paid in 2009 and $579 million remained in dispute.

Although the individual face value of unclaimed benefits is likely to be small, the collective financial damage could be great.

The pickup in regulatory activity hasn’t gone unnoticed by plaintiff’s attorneys.

“It sounds like a class action to me, and a very good one,” Vincent DiTommaso, a partner at DiTommaso Lubin PC, said in a story that appeared last week on Investment News.com about the allegation of fees’ being deducted from the accounts of the deceased.