Life insurance can be a significant estate asset for many individuals. However, unanticipated problems can arise when trying to collect that asset.

In 2011, a Wall Street Journal article (Leslie Scism, “Death Policy Probe Grows,” July 5, 2011, reported actions by New York State’s attorney general to determine if life insurance companies were taking sufficient steps to ensure that proceeds of life insurance policies were being paid. It alleged that insurers did not routinely use the Social Security Death Index to determine if their insured policyholders had died. Companies did, however, routinely use that tool to terminate ongoing payments, such as retirement annuities, upon the insured’s death. Thus it was alleged that insurance companies used the data when it was to their advantage—to stop a payment stream—but not when it would benefit customers. Under New York’s Martin Law, such behavior could conceivably be deemed fraudulent, as the law does not require proof of intent to defraud.

Insurance companies took the position that life insurance contracts require beneficiaries to notify the company of the insured party’s death by filing a claim, and that in the vast majority of cases, such claims are made on a timely basis. If an insured party dies and no claim is filed, the company continues to hold the proceeds. New York, like most states, has abandoned property laws, under which unclaimed funds belonging to another party must be turned over to the state after a certain period of time. If the insurance company does not know of the death, it cannot then comply with the abandoned property law. The question raised by New York’s attorney general was whether companies should be expected to proactively monitor their policyholder bases to determine when deaths have occurred. The Social Security Death Index is highly reliable and easy to use, and was clearly already being used by insurers when it benefits them. While in many cases the process of initiating payout from beneficiary claims is satisfactory, it can prove challenging. The author’s personal experience is a case in point.

It is important for insured parties to maintain good records and to keep beneficiaries informed.

A Personal Experience

My mother died in January 2007 at age 90. She had a small life insurance policy written by a well-known insurer that had been taken out by her parents in 1927, when she was 10 years old. It was a 20-payment life policy, and thus the policy was fully paid up in 1947. In her files, along with the policy itself, were a document showing that a further policy loan had been paid up in 1958 and a 1982 change of beneficiary form that changed the beneficiaries from her now-deceased parents to her husband as primary beneficiary and me, her oldest son, as contingent beneficiary. A company representative had signed off on the beneficiary change. In subsequent years, my mother would often state, usually jokingly, that the company must have lost her policy, as she never received any correspondence from them. Her address had not changed in over 50 years.

In February 2007, I contacted the insurance company in Hartford, Connecticut to file a claim. The following month, I received a response from a different company in North Carolina that they had no record of such a policy. They said I could send whatever information I had to their policy research department, however, and they would look into it. I sent copies of the policy and the other documents as requested. For months I received no response, despite several inquiries. After several months, I filed an inquiry with the State Insurance Department. They eventually responded there was nothing they could do, enclosing a letter from the North Carolina entity that there was no record of the policy, that it had undoubtedly been terminated, and that they did not keep records of terminated policies after seven years. Moreover, they asserted that if the policy had been in effect, my mother certainly would have received correspondence from them over the years. All of these conclusions ultimately proved to be incorrect.

To me, the conclusion that the policy had been terminated was untenable. It could not have been terminated for non-payment, as it was fully paid up in 1947 and a policy loan was repaid in 1958. It clearly still existed in 1982, as the company acknowledged the beneficiary change. Having done my parents’ taxes for many years, I knew it had not been cashed in.

Discouraged by my lack of success, I did not pursue the matter for several months. About 15 months after my mother’s death, I took up the cause again. The State Insurance Department had told me that some of the company’s “N-series” policies (my mother’s policy number was an N followed by six digits) had been transferred to a different company in Illinois. I contacted that company, who said they did not have that policy and referred me to the head office in Hartford. They in turn referred me to the life insurance unit in North Carolina, who again maintained there was no record of this policy, and in any event they had no policies with six-digit numbers. They referred me to the group life department (which made no sense, as it was clearly an individual policy). They referred me back to the life insurance department in North Carolina. Fortunately, the representative I got this time quickly determined that the policy number needed to have seven digits, so she tried a zero before and then after my six-digit number. One of these worked, and she immediately found the policy under my mother’s maiden name. She asked that I fax a copy of my mother’s and father’s death certificates and the change of beneficiary form to her. I did so immediately, and I had the check within about a week.

Lessons Learned

Life insurance policies can be very long-term contracts; my mother’s was in existence for 80 years. Over time, financial contracts are frequently transferred from one entity to another. In addition, information systems and technologies are likely to change many times over such a time span, and new identifiers may be assigned to contracts (such as the change from six-digit to seven-digit policy numbers). Moreover, there had been no overt activity with respect to my mother’s policy since the 1982 change of beneficiary. All these factors may contribute to the inability to locate a valid existing policy.

The company had repeatedly informed me (and the State Insurance Department) that they had no record of the policy. But they did—they just couldn’t find it. A simple action by a phone representative solved the problem in about two minutes, despite well over a year of correspondence.

This experience also emphasizes that it is important for insured parties to maintain good records and to keep beneficiaries informed. The fact that my mother had kept the policy itself for 80 years, the loan payoff for nearly 50 years, and the beneficiary change for 25 years was extremely helpful in eventually collecting the proceeds.

Checklist for Advising Older Clients

In light of the experience described above, CPAs may wish to advise their older clients to undertake the following steps regarding their life insurance policies:

  • Identify life insurance policies held and organize the relevant documentation.
  • Keep up to date with correspondence to indicate that the policy is still in effect and the insurance company is still in existence.
  • Be aware of changes in the identification of the entity holding the policy.
  • Keep the client’s mailing address up to date with the insurance company, especially if the client now resides in a senior-living facility or with a child.
  • If there is no recent correspondence, consider confirming the existence of the policy with the insurance company.
  • Keep policy beneficiaries up to date, and update them when a beneficiary dies.
  • Ensure that beneficiaries are aware of the existence of the policies and the location of documentation.
  • Be especially alert for old policies that were paid up long ago, and for life insurance benefits that may have derived from prior employment or military service.

Life insurance can be a significant estate asset, but it is hard to locate and collect absent good records by the insured.

Ronald J. Huefner, PhD, CPA, CMA is a SUNY distinguished teaching professor emeritus at the University at Buffalo, Buffalo, N.Y. He is a member of The CPA Journal Editorial Board.