60 Minutes: Life insurers systematically don’t pay unless beneficiary comes forward

On Sunday night (April 17), 60 Minutes aired a segment called “Not Paid” about life insurers systematically failing to pay beneficiaries unless a claim is made – even if they are aware the insured has died, and that some insurers have even drained the cash value in whole life policies of policyholders they know are deceased before terminating them.

“Audits of the nation’s leading insurance companies have uncovered a systematic, industry-wide practice of not paying significant numbers of beneficiaries,” 60 Minutes Correspondent Lesley Stahl says in the intro to the 14-minute segment. “In a little-known series of settlements, 25 of the nation’s biggest life insurance companies have agreed to pay more than $7.5 billion dollars in back death benefits. However, about 35 life insurance companies have not settled, and remain under investigation for not paying when the beneficiary is unaware there was a policy – something that is not at all uncommon.”

The segment shows the logos of the 25 companies that have settled with the states, noting that they admitted no wrongdoing but agreed to pay out the more than $7.5 billion directly to the unpaid beneficiaries or to the states, which then try to find the beneficiaries by phone or online.

Here are the 25 companies that have settled (in no particular order):

Midland National

Northwestern Mutual

Allianz

Gerber Life

AIG

Prudential

Sun Life Financial

Symetra

TIAA

Pacific Life

New York Life

Transamerica

Forethought

Guardian

Lincoln Financial Group

Nationwide

MetLife

AXA

Aviva

Voya

John Hancock

The Hartford

Western & Southern Financial Group

Jackson National Life

Genworth

The segment features an interview with Florida Insurance Commissioner Kevin McCarty, who it says led the investigation. Florida very recently passed a law requiring insurance companies to use the Social Security Death Master File (DMF) to track when policyholders die, and then must proactively contact the beneficiary to instigate the claims process. McCarty says many states have similar laws, which put the onus on the insurers to pay out claims when they know a policyholder has died instead of on the beneficiary – who in many cases has no idea the deceased had a life insurance policy naming them as a beneficiary.

McCarty says the investigation found that in many cases the companies have had knowledge about the policyholder’s death in their actual files, yet they have neglected to initiate an investigation and pay the claim. He said upon finding this out, his first reaction was a desire to “punish them for the unconscionable, indefensible behavior that was going on.”

The segment mentions that insurance industry lobbyists argue that the burden falls on the beneficiaries, who are obligated to know what’s in the contracts they enter into.

As the investigators brought the issue to various state treasurers, the treasurers all reacted similarly in that, “This shouldn’t be allowed to happen, and we have to fix it.”

The segment goes on to say that many insurers would use knowledge of a policyholder dying only to their advantage – for example stopping annuity payments, but not paying life insurance death benefits to a beneficiary unless a claim is made and even canceling policies for nonpayment of premiums.

Draining cash values

While the settlements may indeed be old news to those in the industry (many of them occurred several years ago), one thing the 60 Minutes piece did draw out was the dubious practice of some life insurers continuing to pay themselves premiums from the accumulated cash value of whole life policies. Even if the insurer had evidence in their own files that the policyholder had died (which the segment says was the case in about one-third of the cases), some insurers would continue to pay themselves premiums, draining the cash value. When it was all used up, they would cancel the policies. Under the law, insurance companies are allowed to pay themselves premiums from the cash value only while the policyholder is alive.

Also at issue in the segment is the 35 companies that have yet to settle, and the fact that some of them are fighting “tooth and nail” against legislation that would force them to go back and search for old beneficiaries and pay them retroactively.

Oklahoma Treasurer Ken Miller says at stake is about $3 billion more in unclaimed benefits nationwide, in addition to the $7.5 billion from the 25 companies that have already settled.

Finally, the segment makes a point about the cumulative value of the unpaid benefits, and how it adds up to billions of dollars over the years for the insurance companies. The story cites an Oklahoma woman who didn’t know about her husband’s policy – but because of a settlement she got a check worth $22,000. Stahl asked Miller how much an insurance company can make by holding onto the $22,000.

“Now you’ve hit on something that’s the most important issue, and that’s the time value of money. Because that’s what this is all about. This is about money,” Miller said. “That $22,000, invested for 50 years at an 8% return becomes $1.2 million (that the company makes because the death benefit was never paid out to the beneficiary), and that’s just one small policy. You expand that over all the policies…  it’s a tremendous amount of money – billions and billions of dollars.”

Bottom line: The 60 Minutes piece probably didn’t move the needle much in the court of public opinion.

While the intentional draining of cash values when they know the policyholder has died and a beneficiary has not made a claim is reprehensible, it’s hard to believe that practice was widespread. And practices such as stopping annuity payments on one side as soon as a death is discovered but not paying out a life insurance death benefit on the other is poor ethics, no question.

But it is important to look at the bigger picture – and that is remembering that most of the largest insurers have already settled and are now using the DMF and complying with state laws to proactively contact beneficiaries.

Problems in the system have been identified, and appropriate measures have been and are still being made to correct them, and policyholders now and in the future are better off for it.

Expect more settlements to come, but don’t expect to hear much about it in the news.