It's a practice that's greedy, cold and should be illegal.
When policyholders pass away, some big insurers ignore their deaths and hang on to what would be substantial life insurance payouts. Yet the same companies respond at once when a customer's death lets them stop payouts on income-producing investments.
Case in point: Regulators say Nationwide selectively tracked policyholder deaths in order to cut off payments to annuity holders. That helps the insurer, since an annuity holder only receives payments as long as he or she lives. But Nationwide did not use the same tracking system to identify deceased life insurance policyholders and pay their beneficiaries.
Those practices caught up to Nationwide last week when the insurer reached an agreement with Florida and six other states over hundreds of millions of dollars in unclaimed death benefits.
Nationwide identified 4,747 unclaimed death benefits. The company's paid $144.1 million to beneficiaries and also agreed to pay $7.2 million to the seven states. Typical of these agreements, Nationwide denied any wrongdoing and said it has cooperated in the inquiry.
It's the tip of an iceberg, suggests an investigative task force of state insurance regulators and attorneys general.
Just ask the daughter of Thomas F. Kelly Sr., a former printing plant worker for the New York Times, who died in 2002 in Port Richey at the age of 87. Daughter Mary Lou Sowa of New Port Richey, a retired beautician, contacted her father's insurance company about two insurance policies she had found and was paid as a beneficiary.
Inquired Sowa: Did my father have any other policies?
Nope. The insurer said that's all — until this year when a company audit found three more polices owned by Kelly. Sowa, who turns 66 next month, received $7,000 — 10 years late. Her tale was cited by the Wall Street Journal earlier this year.
Sowa is one of thousands of beneficiaries of insurance policies who either never see the money or, in Sowa's circumstances, received their benefits years later. Many beneficiaries do not even know there are policies in their names. Others know it, can't find the policies and simply never file a claim.
Underlying all this is the assumption that insurance companies will do the right thing and pay up after they learn a policyholder has died.
That would be a poor assumption. And that should sound an alarm.
Before dying, policyholders should do two things: inform beneficiaries that they will have money coming to them, and tell them where the actual policies are kept. Beneficiaries should ask where such policies are stored while the policyholder is alive.
The task force formed by the National Association of Insurance Commissioners is investigating how the insurance industry handles unclaimed death benefits. It is chaired by Florida's own insurance commissioner, Kevin McCarty.
The task force says life insurers have failed to pay more than $1 billion in death benefits over the years because of the practice of requiring beneficiaries to file a claim following a death.
No claim? No payout.
Nationwide now joins MetLife, Prudential and John Hancock in reaching settlements. Insurers American International Group and Lincoln Financial are among others under task force scrutiny as state regulators press the industry to pay out on old or forgotten policies.
The task force agreements require insurers to follow through in two ways. They must make an effort to pay the beneficiaries. If unable to find them, insurers must pass on the policy proceeds to a state's unclaimed property division once they identify the deceased policyholder.
"Florida has an outstanding record for returning unclaimed property to its rightful owners," McCarty said in a hearing focused on insurer practices.
Under the settlement agreement, insurers must regularly compare the Social Security "death master file" — perhaps the most definitive listing of people who have died — with company records of life insurance policies.
In June, 43 state insurance departments joined a $40 million settlement agreement with MetLife as part of the NAIC investigation. At the time, regulators said the agreement could yield more than $400 million in unpaid benefits.
So what has happened to all those millions not paid out over the years? Can insurers simply keep the money for themselves?
Many state laws allow insurers to keep unclaimed policies on their books until the insured person would be at least 95 years old. Only then are the policy death benefits handed over to the unclaimed property departments of states.
But here's the trick: When premiums are no longer paid on a policy, insurance companies can keep the coverage up to date by cannibalizing the policy, draining its value over the years. By age 95, there's often little left to hand over to the state.
It's good news that the state insurance commissioners and attorneys general are looking into this travesty. I'm still skeptical that the insurers, now that they have forked over their settlement money, will be held as accountable as they should be.
How much effort will insurers really make to find and contact the beneficiaries of their policies? In 1999, a Wall Street Journal story notes, insurer John Hancock mailed a notice to the last known addresses of about 800,000 burial-insurance policyholders but said at the time that 412,000 of the mailings couldn't be delivered.
Regulators must insist on and police a higher level of industry effort going forward.
Robert Trigaux can be reached at firstname.lastname@example.org.