Money & the Law: Agreement targets delay in death benefits

Life insurance companies have, for the most part, avoided the criticism being directed at other players in the financial services industry in the aftermath of the economic meltdown.

But a couple of weeks ago, the life insurance industry took a hit when an agreement between Prudential Financial and 19 states (including Colorado) and the District of Columbia was announced. 

The agreement relates to the seeming failure on the part of life insurance companies to try very hard to identify people covered by life insurance policies who have died. Although life insurance companies are quick to determine the death of people receiving payments under annuity contracts, not so with life insurance contracts.

With an annuity contract, the sooner someone dies and the insurance company can stop making payments, the more profitable the contract becomes. With a life insurance contract, however, the longer the insurance company can hold onto premiums without having to pay a death benefit, the more profitable the contract becomes.

State insurance commissioners and state treasurers have been after life insurance companies to change their ways for several years. They want the companies to use the same tools they employ to determine deaths in the administration of annuity contracts to determine when death benefits are owed under life insurance policies. 

Although states trumpet these activities as benevolent acts of consumer protection, they also have their eye on another target — unclaimed property funds. All states have these funds and they use the money in the funds to help pay the costs of government. In the case of life insurance death benefits, states want life insurance companies to determine that a death has occurred as soon as possible because this starts the clock running on when a death benefit must be paid into a state’s unclaimed property fund if no beneficiary entitled to receive the benefit can be found.

The agreement with Prudential came after an audit of its practices revealed some interesting numbers. The audit showed that, in California, Prudential was sitting on more than 1,000 policies where the individual whose life was insured had been dead for more than 15 years. And officials have estimated that, in the country as a whole, as much as $1 billion in unpaid death benefits is still on the books of life insurance companies.

Under the agreement, Prudential has promised to change its procedures, even though it says there is no legal obligation on its part to do so. Prudential has also agreed to restore value to life insurance policies in any circumstance where premiums were charged against cash reserves after the insured individual had died. In addition, it has agreed to include interest at 3 percent, compounded annually, on death benefits it has failed to pay. 

Life insurer John Hancock entered into a similar agreement last year with more than 20 states, and the action here is far from over. Prudential is still negotiating with states that didn’t join in the current agreement, and multiple negotiations are ongoing between state agencies and other life insurance companies over the same issues.
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Jim Flynn is a private attorney at Flynn Wright & Fredman LLC in Colorado Springs. Reach him at jtflynn@fwflegal.com.