It’s the life insurance industry’s big mystery: How much money is missing?
By industry calculations, 1 percent to 2 percent of all life insurance policy benefits go unclaimed, says Mary Pitman, author of The Little Book of Missing Money. Sometimes, people are unaware their loved ones had life insurance or are unaware they're named as beneficiaries. Beneficiaries also may have moved away from an address listed on the policy.
Estimates of the amount of unclaimed life insurance benefits in the United States range from $1 billion to $3 billion. But no one really knows exactly how much money is missing. This is partly because unclaimed life insurance funds rest in two places -- with insurers and with state governments -- and partly because no single entity tracks this money.
On the insurer side, groups including the Insurance Information Institute, Life Insurance Marketing and Research Association, American Council of Life Insurers and National Association of Unclaimed Property Administrators say they don't have any figures regarding unclaimed funds. Life insurance companies normally don't share their data on unclaimed policy benefits.
But a hearing held in 2011 by Florida's insurance commissioner revealed one insurer’s figures. MetLife testified it had $325 million in unpaid life insurance funds in 2010 that had not been turned over to the states. Another $51 million had been turned over to the states that year. After a dormancy period that varies from state to state – usually three to five years after a death is discovered by a life insurance company – insurers must "escheat," or transfer, unclaimed funds to state governments.
The total amount of death benefits from life insurance policies that states are holding is another unknown number. Some states are forthcoming about their figures, though.
For instance, R.J. DeSilva, a spokesman for the Texas comptroller, reports it held $227.6 million in unclaimed life insurance benefits at the end of fiscal 2011 and paid out just $4.5 million. California returned nearly $8.4 million to residents from its unclaimed insurance funds -- including life insurance benefits -- in the 2010-11 fiscal year and had $163 million in total unclaimed property of all types, says Hallye Jordan, a spokeswoman for the California controller’s office.
The effect of 'de-mutualization'
Advocacy groups and state insurance regulators are pressuring insurers to disclose how much unclaimed life insurance money they hold. State insurance regulators have put the figure at roughly $1 billion, says Brendan Bridgeland, director of the nonprofit Center for Insurance Research, a consumer advocacy group.
Bridgeland estimates that closer to $3 billion in life insurance money is unclaimed. Of that, $2 billion sits in accounts affected by insurer de-mutualizations, he says.
In the past, many major life insurers changed their ownership structure from policyholder ownership – the “mutual fund” structure – to ownership through public traded stock. In the conversion (de-mutualization) process, many policies were switched to shares of company stock instead of cash, with the owners free to cash out or hold the stock. But many policyholders couldn’t be found. For instance, the State of Florida received 140,000 accounts worth $85 million by MetLife after the insurer's de-mutualization in 2000.
Other factors contribute to the missing-money problem, too:
Responsibility rests with the beneficiary. No state or federal laws require insurers to check regularly to see whether a policyholder has died.
“Essentially, the industry is self-reporting that it is looking for beneficiaries,” says Florida insurance agent Michael Hartmann, who created the policy registration website FindYourPolicy.com.
Long dormancy periods. Here’s the insurance industry’s dirty little secret: It could be 30 years or more after someone dies before the insurer must turn over the unclaimed life insurance money. Currently, some insurers just look for a death record in the Social Security Death Master File – the federal government’s official record of deaths recorded by Social Security number – after what would have been that policyholder’s 100th birthday. For instance, MetLife executives disclosed at the Florida hearing that the company didn’t begin checking the Master File for beneficiaries until 2006.
If your grandpa died in 1973 at age 65, the insurance company might not have discovered this until 35 years later. At that point, the three- to five-year “dormancy” period would start. During that time, the insurer is supposed to search for beneficiaries. This adds even more years before your state might receive the money. As it stands now, no government agency oversees whether or how vigorously insurers search for beneficiaries, Pitman says.
Account value drainage. Some life insurance policies are set up so that a pool of cash accumulates in the policyholder’s account. After death, the insurer may start deducting the premium costs from the policy’s cash value if beneficiaries can’t be found. In some cases, a policy could be drained dry over the course of decades, Bridgeland says. For example, one owner of a John Hancock policy issued in 1963 died in 1999, according to Florida officials. The insurer then drew premium payments from the account until it reached a zero balance. The policy then was canceled. No money ever was paid to beneficiaries or turned over to the state, Florida regulators found.
“Paid up” company policies. Many small policies that companies offered their workers before the 1980s were declared paid in full at some point, usually many years ago. That means premium notices won't arrive to alert relatives that a policy even existed, Bridgeland says.
Credit card policies. Many major credit cards now automatically include a small life insurance policy as a perk, usually in the form of accidental death insurance. Once again, no bills will come – you’d need to check with the issuers of all the cards that the deceased person had.
“These are routinely $100,000 policies that never get claimed,” Pitman says.
Many places to look. Because there's no national database to search for unclaimed life insurance policies, people who think they might be a beneficiary must search in dozens of places for a policy, including the policyholder’s current and former states of residence as well the state where the insurer is based. If you're looking for money still held by insurers, you've got to visit an individual insurer's website or use a paid search service such as MIB Solutions.
Lack of search expertise. Pitman discovered many policies can be found only by searching terms such as “deceased” or “estate of.” For instance, a recent search Pitman did in California’s database of lost property turned up more than 16,000 results listed under “estate of” rather than the name of the deceased policyholder.
Pushing for reform
What’s being done about the missing money mess? Plenty.
Led by California State Controller John Chiang, more than 20 states have been investigating whether insurers are turning over funds in a timely manner. During legislative hearings, state regulators were incensed to learn that some insurers regularly search the Social Security Death Master File for clients who are owed annuity payments so the insurers can halt payouts, but don’t do the same to determine whether life insurance payouts are due.
Asked for a comment for this story, the American Council of Life Insurers, a trade group, says in a statement: “Life insurers adhere to the letter and spirit of all laws and regulations pertaining to unclaimed life insurance benefits. Many companies are taking proactive measures to locate missing policyholders, and the industry is working with regulators and lawmakers on ways to help ensure all beneficiaries get the benefits they are due.”
Recently, that work has included financial settlements with state officials. In 2011, California's Chiang gained settlements of $20 million each from Prudential Insurance Co. and John Hancock on behalf of the participating states. The settlements require the insurers to check frequently for deaths of insurance policyholders and to restore the balances of thousands of drained accounts, among other reforms. And in March 2012, the Florida Office of Insurance Regulation announced a separate $17 million settlement with Prudential, to be shared by several states. Additional investigations are ongoing.
Searching for money is getting easier, too. Already, information from a majority of states and three Canadian provinces can found on Unclaimed.org, a site operated by the National Association of Unclaimed Property Administrators. States are starting to report their figures for unclaimed insurance benefits to the association as well. Within a few months, the association expects to have a nationwide figure for unclaimed insurance money held by states, says Carolyn Atkinson, who is the group's president and the deputy treasurer for unclaimed property in West Virginia.
Three states – Alabama, Kentucky and Tennessee – are considering legislation based on a model law proposed by the National Association of State Insurance Legislators. Among other reforms, the proposed laws would require life insurance companies to frequently check the Death Master File for the names of policyholders. Ohio proactively calls major insurers in pursuit of information about residents’ death benefits from life insurance policies.
Advocates hope these changes will help more people locate insurance money. FindYourPolicy’s Hartmann started his website after experiencing his own frustrations searching for life insurance policies that his father had taken out. He lucked out and located paperwork for one small policy hidden in his parents’ home, but he thinks another policy is still out there -- unclaimed. He doesn’t know how much money might be outstanding. Harmann says he's certain his mother knew about the policy, but she died in 2011.
Atkinson, the leader of the unclaimed property administrators group, was more fortunate. Her grandfather's life insurance policy was found.
“My grandfather had life insurance and then got dementia,” she says. “But luckily, he kept good files.”