Don't Take Life Insurance Payouts for Granted

State investigators are exploring whether too many beneficiaries fail to receive payments.

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Getting the desired life insurance to deal with estate considerations, heirs, and the financial protection of loved ones has long been a major goal advocated by financial planning experts. Yet, seldom is much attention paid to guaranteeing that beneficiaries actually receive their entitled death benefits. And if it's your life insurance that's involved, of course, you're not going to be around to check up on how things went.

The assumption that life insurance payouts will always proceed as intended is being questioned in an expanding set of state investigations, centered primarily in Florida and California. Both states have called hearings to explore life insurer practices in paying death benefits. Several companies have been called so far to participate, including MetLife and Nationwide Financial Services. John Hancock, a unit of Manulife Financial, has already signed a settlement agreement concerning its practices.

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The two states are part of a broader, 35-state group assembled to explore whether states are missing out on possible revenue from unclaimed life insurance payments. As reported in the Wall Street Journal, recessionary pressure on state finances prompted the search for new revenue sources.

The proceeds of life insurance policies can be secured by states if the policy benefits are not claimed for several years. In some cases, the states allege, life insurers have fallen down in their efforts to locate beneficiaries and have dragged their feet on informing the states of unclaimed policies.

California audited the practices of 21 life insurers and says it found a pattern of troubling behavior. According to a recent statement from the office of state controller John Chiang:

"The audit revealed an industry-wide practice of companies failing to pay death benefits to the beneficiaries of life insurance policies. Instead, companies would draw-down the policies' cash reserves in order to continue collecting premium payments from the deceased. Once the cash reserves were depleted, the company would cancel the policy. The audits also found that insurers did not routinely cross-check the owners of dormant accounts with government databases listing the deceased. In other cases, the company had direct knowledge of the death of a policy owner, but still did not notify the beneficiaries."

Hancock has entered a settlement agreement with 23 of the 35 states, including California, under which it agreed to expand efforts to resolve unclaimed property issues. However, it said it was "outraged" by the California controller's "unfounded allegations and characterizations" and said the statement from the controller's office "violated the very agreement that it negotiated and signed with John Hancock."

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MetLife and Nationwide have defended their practices while pledging to cooperate with state investigators. While the extent of unclaimed policies has not been publicly documented, the investigations have highlighted the need for life insurance policyholders to take steps to avoid claims-paying problems in the event of their death.

In particular, consumers need to be aware that the legal obligation to trigger a life insurance death-benefit payment rests with policy beneficiaries, not the insurance companies. Companies may, to varying degrees, make efforts to contact beneficiaries. But there may be no contractual requirement to do so.

To make sure your life insurance benefits are paid according to your wishes, experts suggest several basic precautions:

1. Beneficiaries. Make sure your beneficiary choices are clearly identified in your policy, including their names, addresses, and Social Security numbers. Review beneficiary details regularly, and update beneficiaries and their contact information as needed. This should include primary and contingent beneficiaries.

2. Records. Keep multiple copies of your life insurance records in different places. Consider an online storage site for digital copies of all your key financial records. You can pay a back-up company to provide this service or do it yourself, using Google or another free "cloud" storage site. (Note: Experts warn that policies should not be kept in safe deposit boxes, because boxes routinely are sealed upon death and may not be accessible for some time.)

[See How to Overcome 12 Retirement Challenges.]

3. Communications. If you died tomorrow, would your beneficiaries have the information they needed to file life insurance claims? The odds are, they would not. We're uncomfortable with death-related discussions and planning. Get over the discomfort. Send them policy details. Consider giving them password access to your digital records. Think about how much your family and heirs would appreciate your help in being able to carry out what are, after all, your wishes.

4. Next steps. If you have a financial planner, personal attorney, or even a life insurance agent, enlist their help in making sure your beneficiaries can quickly file claims on your life insurance policies. If you don't have a third party to help, consider sending "next step" information directly to your beneficiaries. Where can they get copies of your death certificate? What are the insurance company addresses to which the certificate (a certified copy is needed) and policy claims should be submitted?

Twitter: @PhilMoeller