States' probe of death benefit payouts could spawn regs

A continuing three-year, 35-state investigation into the practices by which life insurers pay death benefits may spawn more-stringent requirements for locating beneficiaries. Although the investigation, which focuses on 21 insurers and was conducted by auditing firm Verus Financial LLC, is still in its early stages, it already has brought to light the fact that there is no single standard for handling death benefit payments when no beneficiary comes forward. Cases in California and Florida suggest that the insurers could have done more, including referring to government databases such as the Social Security Administration's master death list, to determine if any of their policyholders had died. Insurers maintain that they aren't required to do any more than pay a benefit when they receive notification from a beneficiary or heir. Although that explanation is correct in terms of the insurers' legal obligations, chances are that the standard for finding beneficiaries will change once state and national regulators weigh in. Thus far, California's controller has reached a settlement with John Hancock Financial Services Inc. that requires the insurer to refund premiums to more than 6,400 accounts dating back to 1992, and pay the beneficiaries of insurance policies and matured annuities more than $20 million. California also has subpoenaed MetLife Inc. to send representatives to a May 23 hearing on the practices it uses to identify which customers have died, and its compliance with unclaimed-property laws. Florida will have its own hearing with MetLife and Nationwide Financial Services Inc. May 19. Connecticut announced its own probe last week. Because insurers are regulated by states, the quickest path to reforming regulation would be if a state's insurance department pushed its legislature to amend the state's claims settlement law. The National Association of Insurance Commissioners, the organization of state regulators that recommends rules, also could detail a best-practices model dealing with due diligence for beneficiaries. Such recommendations typically are adopted nationally. State insurance regulators took that approach when dealing with retained-asset accounts, another hotly debated topic, said Steven Kass, a partner at Jorden Burt LLP. “State laws require certain things in insurance policies,” he said. But “currently, there is nothing that says, "We'll periodically examine the death index and if your name pops up, we'll cut your beneficiary a check.'” Meanwhile, the Uniform Unclaimed Property Act of 1995 sets a guideline for insurers to follow when death benefit proceeds are deemed abandoned. If a death claim isn't submitted, the law says that the policy is payable upon the maturity of the policy — when the insured person would have reached age 100 or 120, based on the mortality table used in the contract — plus an additional three to five years, the length of time that must pass in order for the account to be considered dormant or abandoned. That is too long, regulators contend. In practice, insurers have used varying levels of due diligence, said Douglas Wheeler, director of the division of insurance in New Jersey. Along with California and Florida, New Jersey is one of 10 states in a NAIC task force covering life and annuities claim settlement practices. The task force is relatively new, however, and hasn't yet issued guidelines. “We know some companies go well beyond what the law requires,” Mr. Wheeler said. “Some companies will cross-check the death master list when they're not required to; they do it as a matter of practice.” The task force will evaluate existing laws and the extent of the insurers' due diligence, Mr. Wheeler said. New Jersey's unclaimed-property unit falls under the jurisdiction of the state's treasury department, but he said that he expects the insurance division to be able to work with the treasury on the issue.

OHIO TAKES MIDDLE GROUND

Ohio has a program that helps people locate lost life insurance policies before they go into its unclaimed-property kitty, Mr. Kass said. “It's a middle ground that's less intrusive, and it may have less negative potential side effects,” such as insurers contacting the wrong beneficiary due to incorrect data, he said. Meanwhile, the states' findings have incensed financial advisers. “If someone doesn't pay their premium, the insurer is all over them. But how hard do they go, looking for the heirs?” said Meg Green, an adviser at Meg Green & Associates. “If an insured dies, the beneficiary may have no idea they had life insurance. If nobody tells the life insurance company, nobody gets paid — and now the insurer doesn't even acknowledge the death,” said Austin Frye, president of Frye Financial Center. E-mail Darla Mercado at dmercado@investmentnews.com.