Money for the Dead
Life Insurers Pressed on Lost Policies
By Leslie Scism | The Wall Street Journal
Mon, Aug 13, 2012
Mary Lou Sowa scoured her father's records after his death, told a life insurer about two policies she found and received the proceeds. But when she asked about indications that he held other policies as well, she says the insurer told her it owed nothing more.
That was a decade ago. Last year came a surprise: a check for $7,000 for payouts on three additional life-insurance policies it turned out Ms. Sowa's father had bought.
They were found as a result of a wide-ranging effort by state officials that is giving insurers headaches: pressure to make sure companies pay out on old, sometimes forgotten policies on the lives of people who have long since died.
"Can you imagine all the millions or billions of dollars that belong to other people and they don't know to claim it?" said Ms. Sowa, a retired beautician in New Port Richey, Fla.
State regulators estimate that over the decades, life insurers have failed to pay well over $1 billion in death benefits because it is up to beneficiaries to file a claim following a death.
An industry official didn't dispute the figure but said whatever the amount is, it is "a very small percentage" of total claims paid. "We know the percentages represent real people, and we've been working with policy makers on ways to ensure all policyholders get the benefits they deserve," said the official, Bruce Ferguson of the American Council of Life Insurers.
Three companies, in pacts with dozens of states, have in recent months reached settlements that require the insurers to check their policyholder lists regularly against a death database and try to track down survivors of anyone whose death shows up. The deals upend more than a century of practice in how life-insurance benefits get paid.
Besides these companies—MetLife Inc., Prudential Financial Inc. and the John Hancock unit of Manulife Financial Corp.—at least eight other insurers, including American International Group Inc., Lincoln National Corp. and Nationwide Financial Services Inc., are under the scrutiny of a multistate task force, and another settlement could come as early as this week, say people familiar with the investigations.
AIG declined to comment. Nationwide said it "has been cooperating fully with the states' regulators" and "will continue to do so in hopes of resolving their concerns." Lincoln said it is cooperating and has "always viewed paying all legitimate claims to our clients in a timely fashion as a matter of utmost importance."
Standard language in life-insurance policies makes clear it is up to beneficiaries to notify the insurer when an insured person has died. But few companies want to take shelter in that argument—and risk a public-relations black eye—in the face of database technology that today makes it relatively easy to cross-check policies against deaths.
In addition, opposing a requirement to check the databases would be particularly difficult given that many insurance companies already check them when it is in their interest—that is, to learn about the deaths of annuity customers. Such deaths usually end insurers' duty to make payments under retirement-income contracts.
Life-insurance companies don't get to simply keep the money that is due beneficiaries who fail to file claims. Under many state laws, insurers can keep unclaimed policies on their books until the insured person would be at least 95 years old, after which time the policies—and death benefits due on them—are handed over to state unclaimed-property departments.
Besides the multistate task force that is pressing insurers, which is led by Florida Insurance Commissioner Kevin McCarty, separate efforts are under way in New York. Its Department of Financial Services last year ordered insurers to check policyholder names against a death database, a move state officials have reported has already resulted in hundreds of millions of dollars being paid. Also, the offices of New York's attorney general and its comptroller have teamed up to work on what they have called a "comprehensive investigation" of death-benefit practices.
New York Life Insurance Co. has pushed back at the idea of negotiating a deal with regulators to settle on a new approach. "There is a tried-and-true process for developing new regulations in our industry that includes legislative debate, public notice and a comment period for both the public and the regulated to offer opinions before a law is adopted," a New York Life spokesman said, calling it "a major departure for regulators to change regulation through enforcement action and to penalize insurers when they have fulfilled their obligations under the law." New York Life last year began using a death database routinely.
Mary Jane Wilson-Bilik, a lawyer for insurers, objected to the notion that insurers "somehow…weren't meeting their legal obligations" by not having used the death database earlier.
Policies on which insurers receive no death claim mostly consist of small ones sold from around 1900 to the early 1960s. Agents went door to door in working-class neighborhoods pitching what were called "industrial" or "burial" policies, often just enough to pay for a funeral.
Ms. Sowa in Florida recalls that when she was growing up on New York's Long Island, she often saw her father, a printing-plant worker, hand cash payments to a visiting life-insurance agent, who would make some marks in a ledger and then close it before returning the next week.
The business of selling these small policies succumbed to criticism that the coverage cost too much. In addition, insurers wanted to trim expenses related to agents. Many simply declared all such small policies paid in full.
That meant, however, that insurers were no longer keeping up with the addresses of policyholders, with the result that companies gradually lost track of some of them.
Trade groups coordinated some efforts to find policies for families who believed they might be beneficiaries. But insurers had "no strong incentive to devote extensive resources" to the projects, says Joseph Belth, an emeritus professor of insurance at Indiana University.
That changed when some mutual insurers decided to go public. The step required them to cash out existing policyholders, who are the owners of mutual insurers.
In 1999, 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.
Massachusetts officials and consumer advocates said this showed the Boston-based company wasn't trying hard enough. In response, it hired an address-search firm and provided names to states to run through voter-registration, motor-vehicle, tax and other databases.
With this effort, John Hancock learned of several thousand deaths. Still, more than 300,000 policyholders remained unaccounted for when the Massachusetts insurance commissioner approved a conversion to stock ownership.
MetLife, for its part, mounted an effort in 1989 with a media campaign featuring TV weatherman Willard Scott, whose father was a MetLife agent and sold the so-called industrial policies. The company said it was seeking five million policyholders whose insurance totaled $4.2 billion.
MetLife says it made "considerable efforts" to find policyholders. By the time it won regulatory approval to "demutualize" in April 2000, its list of lost policyholders was down to roughly 1.1 million.
With so many policyholder-owners still missing when the insurers went public, the insurers turned over to state unclaimed-property departments about $4 billion in cash and stock that these customers were owed. But they generally held on to the underlying policies.
With such sums at stake, lawyer James Hartley Jr. of Waterbury, Conn., saw a business opportunity: an auditing firm that would work with state treasurers to identify policies that ought to be turned over as abandoned property because the insured people were dead.
The concept had appeal with states: They could help customers and get good publicity when people collected from their websites and other efforts. States typically reunite with owners less than 60% of the money they receive—and can keep the rest.
One of Mr. Hartley's business partners had a son who was a former Federal Bureau of Investigation agent experienced in using databases. Backed by money from investors, they hired programmers to write computer algorithms that could feed millions of names into the Social Security Death Master File—trying misspellings and adjusting for possible transposed digits in Social Security numbers and birth dates—to help find out about policyholder deaths.
"It is relatively easy to determine on a one-off basis if a particular individual is dead," Mr. Hartley said. For an industry with millions of customers, though, "an algorithmic-based system had to be designed, and that was an enormous task."
By 2009, their sleuthing company, closely held Verus Financial LLC, had the first of what are now 44 contracts with states.
It also alerted states to a discovery it had made: Insurers were using the Social Security death database—in their annuity businesses, where it clearly benefited them.
MetLife had begun using the database to cut off payments to dead annuity owners soon after the database became commercially available in the 1980s, company executives told Florida officials at a hearing last year. Not until 2007, however, did the firm start using the database to find out if life-insurance customers had died.
Belinda Miller, general counsel for the Florida Office of Insurance Regulation, told MetLife executives that their differing procedures on annuities and life insurance were "a little offensive to people." When the company was "looking for a way to stop paying" customers, she said, it found them easily enough.
The company responded that life-insurance beneficiaries have an incentive to notify an insurer promptly of a death, unlike heirs of customers who bought annuities that pay so long as they live.
MetLife told the Florida officials that its 2007 cross-checking effort identified 18,000 policyholders who died between 1978 and 2006. Their beneficiaries were owed $83 million, equal to 0.2% of $44 billion the company had paid to beneficiaries who filed claims during the same period. The cross-check involved certain policies for which MetLife had Social Security numbers, not the old industrial policies, for which it generally lacked them.
In an April settlement with states, MetLife agreed to check all policyholder names against the Social Security death database every month. It also said it would seek to make contact with 709,000 owners of certain older industrial life policies, representing a total of $438 million in insurance, or their beneficiaries. If it can't find either, it will gradually, over a period of years, pay this money to state unclaimed-property departments.
A MetLife spokesman said it settled to "resolve differences with the state regulators as to the interpretation of unclaimed-property laws and insurance laws, without litigation or administrative procedures."
About $1 billion in life and other insurance is expected to be paid out to policyholders and states as a result of the settlements with MetLife, John Hancock and Prudential.
That includes the $7,000 check to Ms. Sowa in Florida, who split it with her brother. Verus Financial had identified this money in its audit of John Hancock, and the insurer forwarded the policy proceeds to Florida's unclaimed-property department.
A John Hancock spokesman said the company doesn't discuss individual policies. In general, he said, "it is important to remember than many policies are very old [and] without Social Security numbers" or other identifying information.
Though Ms. Sowa had an inkling there might be additional policies besides those that paid out right away, other families have no idea they were named as life-insurance beneficiaries.
Early this year, Meryl Ain of Dix Hills, N.Y., collected about $1,800 from a New York Life policy taken out long ago by an aunt who died in 2002. One of the original beneficiaries was Ms. Ain's father, who died in 2005.
"Many of these insurance companies that didn't make a good-faith effort to find the beneficiaries were being disingenuous," Ms. Ain says. "That's their job."
A New York Life spokesman said the company "long has had procedures in place to identify policyholders who may have died," such as tracking returned mail and sometimes using the Social Security death database, and last year began doing such cross-checking routinely.