Wednesday, April 27, 2016

No. 159: Unclaimed and Unpaid Death Benefits—"60 Minutes" Criticizes Life Insurance Companies

CBS's "60 Minutes," in its lead segment on April 17, 2016 ("the segment"), criticized life insurance companies for not paying billions of dollars in death benefits, and for systematically destroying the equity that many policyholders had built up in their policies. The segment was entitled "Not Paid," Rich Bonin was the producer, and Lesley Stahl was the on-air correspondent.

The subject of unclaimed and unpaid death benefits is complex, and has a long and tortuous history that dates to the beginning of life insurance in this country. My primary concern about the segment is that it is impossible to provide, in 14 minutes, the background necessary for viewers to understand the subject. Here is some of the background.

The Insuring Agreement
The insuring agreement is the heart of any insurance contract. In a life insurance policy, the insuring agreement says the insurance company will pay the death benefit to the beneficiary upon receipt of proof of the insured person's death; that is, upon receipt of a death claim normally accompanied by a death certificate. (Similarly, in a fire insurance policy, the property owner must file a claim for fire damage to the insured property.) The insuring agreement has been approved by state insurance regulators and has long been required by state insurance laws. The segment did not mention the insuring agreement.

State Unclaimed Property Laws
State unclaimed property laws, called "escheat" laws, require financial institutions, including life insurance companies, to turn over (escheat) to the state property that has been unclaimed by its owner for a period such as three years. Each state has an unclaimed property agency, which is under the auspices of the state treasurer or other state official. Usually the unclaimed property agency publishes in newspapers, once or twice a year, names of owners (but not amounts) of unclaimed property. The agencies also operate websites. Owners are urged to contact the agency and follow the steps necessary to retrieve the unclaimed property.

Most unclaimed property is never claimed and therefore is kept by the states in perpetuity. Thus states facing financial problems have an incentive to make sure all unclaimed property is turned over to them. The segment did not mention state unclaimed property agencies, despite the fact that some of the investigations to which the segment referred were initiated by those agencies. Major articles about unclaimed property were in the October 2010 and November 2010 issues of The Insurance Forum.

The Lost Policy Problem
The lost policy problem is as old as life insurance itself. A "lost policy," in this context, is a policy that a beneficiary "thinks" existed on the life of a deceased person, but the beneficiary does not know the name of the insurance company and has no significant information about the policy. The first article about lost policies in The Insurance Forum was in the August 1980 issue. The article mentioned a "lost policy search" service that had been operated for several years by the Institute of Life Insurance, a trade association, but the service was discontinued because of budget constraints and a low success rate.

Later a service was established by what is now the American Council of Life Insurers (ACLI), a life insurance company trade association. The ACLI service involved sending lists periodically (often once a month) to all ACLI member companies showing the information that purported beneficiaries had provided to the ACLI. When the ACLI service was mentioned in a popular consumer finance magazine, the ACLI was inundated with requests. ACLI's member companies protested because of the expense of the large number of searches and the small number of "matches." The ACLI eventually discontinued the service. The segment did not mention the lost policy problem.

Nonforfeiture Options
Nonforfeiture laws first came on the scene in the middle of the 19th century. Their purpose was to protect policyholders who discontinued their level-premium life insurance policies from forfeiting the equity built up in those policies. In the early days, the only nonforfeiture option was a reduced amount of paid-up life insurance. If premiums were not paid, the paid-up insurance eventually would become payable when the insured person died, or when the insured person reached the end of the mortality table on which the policy was based.

Cash values were added later, along with extended term insurance, as additional nonforfeiture options. In those policies, paid-up insurance was usually the automatic option. Therefore, if premiums were not paid, the paid-up insurance eventually would become payable.

In the 1940s, state insurance regulators instituted a significant change by making extended term insurance the automatic option. The change had the advantage that, if a premium was not paid, the full amount of life insurance (rather than a reduced amount) would remain in effect, but only for a limited period of time. Thus the change meant that the extended term insurance would expire without value at the end of the term period. Because of the change, it was possible for a company to assume that the insured person survived the term period, that no benefit was payable, and that the company would never have to turn over anything to state unclaimed property agencies. The segment did not mention nonforfeiture options.

Automatic Premium Loans
Around the middle of the 20th century, automatic premium loan (APL) provisions became what amounted to another nonforfeiture option. They were popular and widely used. When a life insurance policy has a cash value, and therefore a loan value, and when a premium is not paid, the company pays the premium automatically by lending the money to the policyholder under the loan clause. The idea is to prevent the policy from lapsing, on the theory that the policyholder's failure to pay the premium may have been inadvertent.

APL was usually inserted in a policy only at the request of the policyholder, and usually was requested in the policy application. Also, some APL provisions said the company would not pay more than one or a few consecutive premiums by APL. Today companies often pay premiums by APL continuously until the cash value is exhausted. The segment did not mention APL; indeed, the segment made it sound as though the companies were stealing money from their policyholders.

The Demutualization Phenomenon
During the late years of the 20th century and the early years of the 21st century, many mutual life insurance companies went through a process called "demutualization." In that process, a mutual company, which is owned by its policyholders, converts itself into a stock company, which is owned by its shareholders. State demutualization laws require the mutual company to obtain the permission of its policyholders (a majority of those voting). Also, to purchase the ownership interests of the mutual company's policyholders, the mutual company must pay them cash and/or give them shares of stock in the new stock company.

To obtain the permission of the policyholders to demutualize, and to pay them for their ownership interests, converting companies had to contact the policyholders by mail. When the companies sent the mail, huge numbers of mailings were returned by the postal service as undeliverable. In other words, the mutual companies had lost contact with millions of policyholders who had discontinued the payment of premiums.

In an interesting twist, the agencies who initially became most interested in the problem of lost policyholders were the state unclaimed property agencies rather than the state insurance regulators. Eventually, after publicity about the problem, state insurance regulators took an interest in the problem.

In the segment, one interviewee, when asked for names of insurance companies involved, mentioned John Hancock, Metropolitan Life, and Prudential as examples. Those three giant companies grew up in the so-called industrial life insurance business, which involved small policies and premiums collected weekly or monthly by agents going door to door. All three of those companies demtualized and found they had huge numbers of lost policyholders. John Hancock received a large amount of adverse publicity that caught the attention of the unclaimed property agency in John Hancock's home state of Massachusetts. The segment did not mention the connection between demutualization and lost policyholders.

The Investigations
Most of those interviewed in the segment have been investigating the practices of life insurance companies related to unclaimed and unpaid death benefits. The investigations have been and are being conducted on behalf of state unclaimed property agencies and state insurance regulators.

The first person interviewed in the segment was Kevin McCarty, the Florida insurance commissioner. He chaired the committee of the National Association of Insurance Commissioners (NAIC) that investigated unclaimed benefits. Also featured in the segment was Jeff Atwater, the Florida chief financial officer. He oversees the Florida unclaimed property agency and other state agencies. In the segment, both McCarty and Atwater criticized insurance companies who apparently knew some insured persons had died but had not paid the death benefits.

Verus Financial LLC (Waterbury, CT) is an auditing firm that has been retained by state unclaimed property agencies and the NAIC to investigate the practices of life insurance companies relating to unclaimed benefits. The segment featured two Verus investigators.

The Death Master File
The U.S. Social Security Administration maintains a Death Master File (DMF) that supposedly lists all deceased persons in the U.S. I have never seen the DMF and know little about it. However, life insurance companies apparently have been able to access it. I do not know the cost of access to the DMF or the terms to which a company must agree in order to use it. The segment mentioned the DMF prominently.

Life Annuities
A life annuity is a contract between a life insurance company and an annuitant under which the company promises to make periodic payments (usually monthly) to the annuitant for as long as the annuitant lives. Apparently some life insurance companies have long used the DMF in an effort to learn of deceased annuitants, so that the companies can stop sending payments to those annuitants. Companies undoubtedly were concerned that they were not being notified of annuitant deaths and that survivors were stealing annuity benefits. Indeed, criminal actions have been taken against some annuitant survivors.

Several years ago there was some embarrassing publicity about the fact that life insurance companies were using the DMF to stop life annuity payments, but were not using the DMF to find insured persons who had died and whose beneficiaries might have been eligible for life insurance benefits that had not been claimed. The inconsistent use of the DMF struck a raw nerve for many observers who viewed it as evidence of unfair and self-serving activity by life insurance companies. I think those revelations prompted state insurance regulators to start investigating the problem of unclaimed benefits several years after state unclaimed property agencies began investigating the problem. The segment mentioned annuities.

The Settlements
Several major life insurance companies have entered into settlement agreements with regulators. Under those settlements, the companies agree to use the DMF routinely to search for the deaths of insured persons whose beneficiaries have failed to file death claims and where death benefits consequently have not been paid. As a result of the agreements, some beneficiaries have been located, and some death benefits have been paid that otherwise would not have been paid. Several other companies remain under investigation and have not yet entered into settlements with the regulators. The segment mentioned the settlement agreements.

The Kemper Lawsuit
In No. 133 (posted December 16, 2015), I discussed three members of the Kemper group of insurance companies who filed a lawsuit in an Illinois state court against Verus Financial, the investigating firm, and against the Illinois state treasurer, who operates the Illinois unclaimed property agency. Two of the several allegations are that Kemper has no legal obligation to search the DMF for deceased policyholders, and that Verus and the state treasurer do not have the legal right to force Kemper to search the DMF. Kemper filed the complaint in October 2015. Thus far there have been no significant developments in the case.

The Industry's Response
I have not seen any response to the segment by any life insurance company. However, I have seen comments from the ACLI and the NAIC.

The segment said no life insurance companies contacted would make anyone available for an interview. However, the segment did not mention that the ACLI arranged for Mary Jo Hudson, former Ohio insurance commissioner and currently an ACLI consultant on unclaimed death benefits, to be interviewed. Stahl interviewed Hudson by telephone on February 12, but "60 Minutes" chose not to interview her on camera.

After the segment aired, I obtained from the ACLI a statement it released on February 23 on unclaimed benefits, and a statement it released on April 18 after the segment aired. The April 18 statement does not mention the segment. Here are excerpts from the April 18 statement:
The life insurance industry is proud of its long history of honoring its obligations to policyholders. In the past ten years alone, insurers have paid more than $600 billion to beneficiaries of life insurance policies....
In a small percentage of cases, life insurance benefits go unclaimed because family members are unaware that they are listed as beneficiaries in existing policies. Life insurers want everyone to receive the benefits to which they are entitled rather than paying unpaid benefits to state governments. That is why the American Council of Life Insurers has advocated since 2012 for state legislatures to adopt a national standard on the issue. Twenty states have enacted laws based on this standard that requires all life insurers to use new technologies to identify policyholders who have died but whose beneficiaries have yet to make a claim. ACLI is urging all states to adopt this standard no later than the end of 2017.... [Underlining in original.]
I also obtained a statement issued on April 20 by John M. Huff, president of the NAIC and Missouri director of insurance. It does not mention the segment. Here is an excerpt:
State insurance regulators are coordinating to address the issue of unclaimed life insurance policy benefits, ensuring beneficiaries receive the benefits to which they are entitled. Coordinated through the NAIC, these efforts have so far resulted in $7.5 billion in benefits returned to consumers, clearing a backlog of unclaimed policies. Regulators continue to work on setting an appropriate and consistent standard regarding the fair treatment of insurance policyholders and beneficiaries. Additionally, the NAIC is currently working on a national system to help consumers locate lost insurance policies....
General Observations
I think it was the Kemper lawsuit against Verus and the Illinois treasurer that brought the subject of unclaimed death benefits to the attention of "60 Minutes." It remains to be seen what happens in the case.

On the positive side, the segment provided a public service by calling attention to the problems of lost policies and unclaimed and unpaid death benefits. On the negative side, the segment was slanted to shine an undeservedly harsh light on life insurance companies.

I have seen no mention of the segment in any major media outlet or in the insurance trade press. Thus the segment's impact, if there will be any impact, remains to be seen.

A Personal Anecdote
My keen interest in the subject of lost policies dates back to the early 1950s, when I was a life insurance agent in Syracuse, New York. One day I was out making cold calls in farm country near Syracuse. I told one farmer who answered my knock on the door that I would like to speak with him about life insurance. He said he would never consider life insurance. When I asked why, he invited me in to explain. He said he had bought a $1,000 policy on the life of his son when the son was born. He paid the premiums for several years, until he encountered hard times and could no longer pay the premiums. Years later his son died, and the farmer said the insurance company did not pay him a dime. I asked if he had filed a claim. He said he had not, because obviously the policy was worthless. I asked him to show me the policy. He said he had long ago thrown it in the incinerator. I asked the name of the company. He did not remember, but he did recall there was a picture of a rock on it. I said it must have been Prudential, and he said that was right. I obtained the necessary information about names and dates, and I wrote to Prudential. The company located the policy. It was for $500, not $1,000. When the policy lapsed, it went on extended term. The term expired a few years before the farmer's son died. I was disappointed, because I had envisioned great publicity by handing the farmer a belated check, including interest from the date of death.

Available Material
I am making available a complimentary 23-page PDF containing the following: the articles in the August 1980, October 2010, and November 2010 issues of The Insurance Forum, the February 23 ACLI statement, a February 24 email to Bonin from an ACLI spokesman, a transcript of the April 17 segment, the April 18 ACLI statement, and the April 20 NAIC statement. Send an email to and ask for the April 2016 package relating to the "60 Minutes" segment.