States have laws stipulating that the government becomes the owner of abandoned property after a period of time.
Billions of dollars in unclaimed life insurance benefits are at the center of a legal wrestling match as cash-strapped state governments step up their efforts to make sure insurance companies properly account for the funds.
Although the money belongs to the beneficiaries, states have laws stipulating that the government becomes the owner of abandoned property after a period of time. Several states, budget-challenged California among them, are aggressively enforcing their unclaimed property laws to force insurers to hand over the money.
“It’s a budgetary issue for additional revenue,” says David Nolte, a principal at Fulcrum Financial Inquiry, a Los Angeles forensic accounting and investigations firm. Technically states hold unclaimed property for the benefit of the owner, but in many cases the owner doesn’t come forward.
That means the state has use of the money interest-free. It’s an easy source of revenue and an important one considering California faces a $15.4 billion budget deficit for the coming fiscal year.
Insurance proceeds are just part of the nearly $33 billion worth of abandoned property sitting in unclaimed accounts held by state officials, says the National Association of Unclaimed Property Administrators.
It’s not uncommon for as much as a third of a state’s unclaimed property to never find its rightful owner, says Brendan Bridgeland, director of the Cambridge, Mass.-based Center for Insurance Research, a non-profit consumer advocacy group.
WHAT’S THE PROBLEM?
It’s often a matter of logistics. Benefits sometimes go unclaimed because insurers lose track of the policyholder or the beneficiaries of life insurance and annuities.
Insurers are required to pay life insurance benefits once they’re notified the policyholder has died. However, if the company isn’t notified by a relative or an estate, the unclaimed benefits may sit on the insurer’s books, sometimes for years. In other cases an insurance company may know a policyholder has died, but is unable to reach the listed beneficiary.
California’s unclaimed property law requires businesses to send lost or abandoned financial accounts to the state after three years. That’s the opportunity California Controller John Chiang realized in going after insurers.
An audit of 21 insurance companies initiated by Chiang’s office found that insurers don’t routinely cross-check the owners of inactive accounts with a Social Security database of deaths. In other cases, companies had direct knowledge of the death of a policy owner, but still didn’t notify beneficiaries, Chiang says.
In a statement he described it as “an industry-wide practice of companies failing to pay death benefits to the beneficiaries of life insurance policies.”
Last month, Chiang announced he had reached a multi-million dollar settlement with insurer John Hancock.
Part of the terms included the company agreeing to reunite more than $20 million of death benefits and matured annuities to owners or beneficiaries. The company, under the agreement, will restore to full value about 6,400 accounts dating back to 1992, Chiang said.
Hancock, a subsidiary of Toronto-based Manulife Financial, said it did nothing wrong and Chiang’s characterization of its behavior is unfair and inaccurate. “Hancock is outraged by the unfounded allegations and characterizations,” the company said in a statement.
As part of the settlement the company agreed to new processes to manage abandoned property. These processes are well beyond those required of insurers by law or regulation, the company said.
This marked the first settlement with an insurer. Chiang plans to push other companies to change procedures and make good on unclaimed benefits. If they don’t, he says he’s willing to file lawsuits to bring the rest of the industry into compliance.
Investors in insurance company stocks should closely monitor the developments because other insurers may be pulled into the fray, insurance industry analyst Randy Binner of FBR Capital Markets said in a recent report.
Focused attention on the issue could result in other states also becoming more aggressive. Already, the Florida Office of Insurance Regulation says it is looking into similar issues. A public hearing is scheduled for May 19 in Tallahassee. Investigative subpoenas have been delivered to Metropolitan Life Insurance and Nationwide Life Insurance to appear and explain their company procedures.
SOLVING THE PROBLEM
Insurers generally comply with state regulations, which often require mailing at least one letter to the last known address of a beneficiary when a policyholder dies. However, companies have an ethical obligation to try harder to find the rightful owner of insurance benefits, says Bridgeland, the Center for Insurance Research director.
“There is room for insurers to do more than what a state process requires,” he says. “There should be more incentive to go a little bit above and beyond.”
For example, many companies search Social Security death records to see if the holder of an inactive policy has died. If the policyholder is listed, the company will send a letter to the beneficiary — but its efforts might stop there if the address is outdated. A search of state tax records or motor vehicle databases would turn up many more beneficiaries, Bridgeland says.
Insurers have their own incentives to hold on to the money. After all, unclaimed funds may stay on the books generating interest income for years.
Insurance regulators and state treasurers could work together more efficiently to update archaic unclaimed property laws, Bridgeland says. He has made several recommendations to the National Association of Insurance Commissioners, including establishing clear standards for the type of searches insurers must complete before turning the money over to states as abandoned.
Families can take a few steps to help avoid losing track of potential payouts.
Policyholders should have a discussion with their beneficiaries, and let them know which company wrote the policy and the name of an insurance agent, if one is used. All of the information, policy numbers, insurance company contact information, and a copy of the policy itself should be kept in a safe place where surviving family members will know to look for it and have access. Consider a safe deposit box or a secure fireproof lock box kept at home.
The policyholder should consider asking the insurance company for an annual policy statement if one isn’t provided.
It’s also important to remain in contact with insurers annually to update new phone numbers or other personal information, particularly in the case of an address change.
Photo credit: Wealth Counsellors
Via USA Today