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Whether it's cheap life insurance, insurers should always pay quickly

In the majority of cases, a claim is made when the life insured dies. Although many insurers delay paying, almost all pay within six months of the claim being received. This keeps the local Insurance Commissioner from getting too excited by the delays. But suppose no claim is made. This may be because none of the survivors are aware of the policy or because, in the upset and distress of dealing with the estate, there’s a delay in making the claim that somehow grows more permanent. It’s not that anyone exactly forgets, it just is not a high priority. This leaves life insurance companies with a large accumulating fund of unpaid money. Without exception, the Insurance Commissioners have regulations in place that require the insurance companies to follow the “best practice” rule. This means insurers should be monitoring all their policies and all the “usual” sources of information about deaths. If a death of one of their policyholders is reported but no claim is made, best practice requires the insurers to attempt to find the beneficiaries.

The most usual source of information is the Social Security Administration Death Master File. There are other reasonably comprehensive databases but once you restrict the investigation to state databases, there’s little information coming in about deaths recorded in other states. Obviously there has been an increase in the problem of identity theft, so even though a name shows up as deceased, this does not automatically mean the policyholder is the one who has died. Insurers should check whether their policyholders have died. It’s all a matter of balancing the internal information about the insurance policies, annuities held, and the status of the accounts against the external information. To give you an idea of the scale of the problem, the New York Department of Financial Services has just finished a two-year investigation. As a result, $812 million has been paid out to 113,560 beneficiaries.

In the New York investigation, some of the benefits had been unpaid for ten years. During that time, the insurers had invested the money and derived income from it. California has also been investigating its insurance companies. The state has just reached agreement with eighteen companies to pay out $267 million to local beneficiaries. In some cases, insurers were found not to have paid even though they had access to federal records proving the death of their policyholders. To avoid criminal prosecution, the two insurers have paid fines to settle the matter. Prudential had been neglecting to pay on the ground it could not find the beneficiaries. It has paid $14 million to avoid prosecution. Obviously all insurers deny wrongdoing but, whether the policy is full-price or cheap life insurance, companies make profits the longer they can hold on to the money. It should not be this way. Beneficiaries should be able to rely on insurers to pay out promptly whether a claim is made. The fact the deceased bought cheap life insurance should not be a justification for poor service.

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