Here's how life insurance normally works when a policyholder dies: His or her beneficiaries file a claim and the insurer pays the claim if it is legitimate. Life insurers have paid more than $600 billion in benefits in the past decade and almost all have been handled this way, said Whit Cornman, a spokesman for the American Council of Life Insurers, a trade group. However, a small percentage of policies go unclaimed. What happens to them?
Beneficiaries sometimes don't know about a life insurance policy. Sometimes they forget. Sometimes they're never told. Sometimes they die before the policyholder. In many states, insurers regularly check something called the Death Master File to see if policyholders have died. The Death Master File sounds like a James Bond villain torture device, but it's simply a record of deaths reported to the Social Security Administration.
Insurers must also look for beneficiaries, according to unclaimed life insurance benefits laws passed by most states. If they find an address for a beneficiary, insurers send claim forms. If they can't find a beneficiary, the money is turned over to the state of the beneficiary's last known address.
What's an 'escheat?'
Life insurance proceeds that go unclaimed for three years end up in the hands of people like Carolyn Atkinson, deputy treasurer of unclaimed property for the state of West Virginia. This transfer of property to the state is known as "escheat." If you're looking for life insurance proceeds and you come across that word, now you know what happened. You're welcome.
In West Virginia, a business holding unclaimed property for three years has to make a last-ditch effort to find the beneficiary, Atkinson said. If they have an address, the insurer must send a letter saying they have the beneficiary's money. If there's no response within a certain amount of time (this varies by state), the money goes to the state treasurer.
How do the states get the money to the right person? Most state treasurers have a website where residents can check to see if their state is holding their unclaimed property and file a claim for it. Nationally, people can use the website missingmoney.com for the same purpose.
If someone using these sites finds a match, they have to provide proof they're the person owed the money. The level of proof varies by state and how much information the state has. Just having an in-state driver's license can be enough in West Virginia, Atkinson said.
However, in many cases, especially with older policies, all the state gets from insurers is a name and not much else, Atkinson said.
"At that point, they need to provide a death certificate and documentation on how they were related to the insured so we can verify their identity," she said.
How it got this way
Insurers did not always check whether policyholders had died. Until a few years ago, only a beneficiary filing a claim alerted insurers about a policyholder's death. But for this to work, beneficiaries had to know the policyholder died and that they had a life insurance policy naming them as a beneficiary, said Devin Hartley, a Connecticut attorney who has written about unclaimed death benefits in the Connecticut Insurance Law Journal.
Checking the Death Master File to find dead policyholders only recently became standard practice for life insurers. However, many insurers already checked the file for dead annuity policyholders to stop payments, Hartley said. State regulators argued the insurers should use the file the same way for both annuities and life insurance in a series of lawsuits in 2012.
Insurers agreed to use the file in several multi-million dollar settlements. In addition, many states have passed legislation requiring them to use the file, Hartley said. These agreements and laws also called for insurers to turn over the benefits to the states after a certain period of time. Almost the entire industry has now agreed to these rules.
The American Council of Life Insurers supports laws requiring regular checks of the Death Master File, said Cornman. Currently, 26 states have adopted laws requiring insurers to check their policy records against the Death Master File, he said.
Big money for the states
The settlements have led to a host of decades-old policies being turned over to the states. West Virginia is still in the midst of litigation against dozens of insurers over unclaimed benefits, but has benefited from settlements reached by other states. From 1976 through 2012, when many insurers settled with other states over the benefits, the West Virginia Treasury collected $3.8 million in life insurance proceeds. In the less than five years since, the Treasury collected $16.4 million.
Some of the money goes back a long way. West Virginia has received the proceeds of many "industrial" policies, taken out as far back as the 1940s, when insurance agents would go door-to-door every week to collect premiums, Atkinson said.
What to do if you think you're a beneficiary
The National Association of Insurance Commissioners (NAIC) launched a tool in November 2016 allowing people to find the life insurance policies and annuity contracts of their dead loved ones. Users of the Life Insurance Policy Locator Service, on the NAIC website, can submit a request asking insurers to search their records to see if they have a policy in the name of a deceased person. You need to know the dead person's name, dates of birth and death and Social Security number. If an insurer finds something, they'll contact the requester within 90 days. Information submitted through the locator is secure and encrypted, the NAIC says.
It can also be helpful to search the records of the deceased person. A regular withdrawal from a bank account could be a sign of a life insurance policy. Your state insurance and unclaimed property departments can also help. Atkinson, of West Virginia, recommended checking unclaimed property websites periodically, because they're regularly updated with new reports.
If you know who provided the home or auto insurance for the dead person, there's a good chance they used the same company for life insurance. The NAIC has more lost policy advice on its website.
To avoid putting your own beneficiaries through a stressful search for policy information, make sure you keep their contact information up to date on your policies, the NAIC said. Also, consider, you know, actually telling them about the policy. Giving the name of the insurance company also helps.
This may make for a morbid conversation, but remember: It will make things easier for your loved ones when you're gone. That's the whole point of life insurance.