Identifying undisclosed assets and unknown accounts for probate administration can be a challenging task under the best of circumstances. Decedents often leave behind a confusing trail of financial information, creating unforeseen demands and distractions for their legal representatives and accounting professionals. Difficulties with record acquisition, review, and resolution, as well as risks of errors and omissions, inevitably increase when the individual is not present to produce documents or explain actions. Nevertheless, many executors, trustees, and CPAs do not anticipate the problems that arise when major institutions, rather than individuals, are the weak points in the probate process. Decades of compliance failures in the life insurance industry have resulted in billions of dollars in unpaid benefits, unreported assets, and uninformed beneficiaries. A series of major settlements—most recently with MetLife in New York—serve as cautionary examples for accounting professionals seeking information on assets and accounts for probate purposes.
Mistakes at MetLife and Other Major Insurers
MetLife, one of the largest providers of life insurance and annuities, recently acknowledged that for the past two decades it has failed to take reasonable efforts to confirm the death of insured parties and notify policy beneficiaries. The insurer entered into a consent order with the New York State Department of Financial Services in January 2019 wherein it agreed to pay restitution of more than $189 million in retroactive benefits, plus a fine of nearly $20 million (“DFS Superintendent Vullo Announces That MetLife Will Pay a $19.75 Million Fine and Provide $189 Million in Restitution to Policyholders for Failures related to Pension Benefit Transfers,” press release, Jan. 28, 2019, https://on.ny.gov/35vJBde). MetLife was cited for violations dating back to 1992, including improper release of reserves for 13,712 group annuity certificates.
This regulatory action is only the latest proof of underreporting and nonpayment of estate and beneficiary interests resulting from systemic compliance failures in the life insurance industry. A series of investigations and unclaimed property audits begun in 2009 by a multistate task force tallied $7.5 billion in unclaimed policy benefits at 25 of the nation’s largest life insurance companies, leading to many major settlements with well-known insurers such as John Hancock, Prudential, and Transamerica. Some of the audited companies had evidence in their files that policyholders had died, but neglected to inform beneficiaries of the existence of the policies or pay the claims, according to Kevin McCarty, the former Florida insurance commissioner who led the task force and described its findings in an interview with 60 Minutes in 2016 (Lesley Stahl, “Life Insurance Industry Under Investigation,” Apr. 16, 2016, https://cbsn.ws/2PoLjHN).
The task force reportedly found examples of active policies with paid premiums being terminated after an insurer received notification of the policyholder’s death. In reported cases where decedents held both a life policy and an annuity, payments to deceased policyholders under the annuity contract were immediately terminated, but the life policies were allowed to lapse without any notification to beneficiaries. Moreover, the cash values of permanent and whole life insurance policies—which have a savings component in addition to death benefits—were allegedly drained to pay more premiums, despite a record of death in the insurer’s files; the policies were posthumously canceled once their cash balances were depleted.
The most serious lapses were found in a small percentage of policies. Most life policies in the U.S. market are paid on time, totaling around $77 billion annually, according to the American Council of Life Insurers (“Benefits Paid,” ACLI website, http://bit.ly/36EwOW4). Standard contracts for life insurance policies stipulate that it is the responsibility of beneficiaries to provide notification of the death and file a claim. Insurers have relied on these contractual terms as legal justification for delay and inaction. “Many life insurance companies built in business practices that intentionally shielded them from knowledge of a policyholder’s death, a practice which drastically reduces the number of policies that are properly—and timely—paid out,” said Florida’s chief financial officer Jeff Atwater in a statement after enactment of a new state law with added consumer protections for life insurance policies (“CFO Atwater Applauds Governor Scott for Signing Life Insurance Legislation,” Florida Department of Financial Services, Apr. 15, 2016, http://bit.ly/2RXKck7).
Combined pressure from state legislatures and regulators is prompting many insurers to take more proactive steps. Under the terms of its settlement in New York, MetLife is now required to utilize an enhanced death database for alerts on policyholders. The consent order also requires MetLife to retain a third-party servicer to locate beneficiaries of unpaid pension benefits, which for smaller estates can represent a substantial portion of total assets (https://on.ny.gov/38ImsGl).
These are positive developments for executors and CPAs tasked with identifying assets for probate; however, problems still exist. Even the best-intentioned claims departments can be hampered by incomplete and outdated files, as well as errors and misattributions in nationwide data sources such as the Social Security Death Master File. Furthermore, dozens of insurers reportedly remain under investigation for their business practices and have not publicly agreed to implement changes. Accordingly, estate representatives and accounting professionals should not wait passively for notification from a life insurance company to determine whether relevant coverage exists. The lack of notice does not necessarily signify the absence of an account.
Practical Steps to Locate Life Insurance Policies and Annuities
Probate administration is like putting together a jigsaw puzzle. Executors are required to prepare a comprehensive accounting of assets for the estate; legal representatives and CPAs often begin this process with imperfect knowledge of the decedent’s financial holdings. They must gradually fill in the whole picture by gathering information from surviving family members, financial institutions, tax agencies, and the decedent’s personal papers. While preparing an estate inventory, it is not uncommon to discover that necessary records are incomplete or inaccessible. What happens if undisclosed accounts and other assets are suspected to exist, but cannot be found? From an accounting perspective, the hardest task in probate and estate administration can be finding those final missing pieces.
Estate representatives should initiate independent inquiries to identify the existence of life insurance, annuities, pension benefits, and related financial instruments. Due diligence of this nature is essential if the decedent’s personal records are incomplete, disordered, or inaccessible. This research can be handled internally or through an investigative agency specializing in asset discovery and financial matters.
Below are six key resources for tracking down information on potential policies.
Since the National Association of Insurance Commissioners (NAIC) launched its Life Insurance Policy Locator Service in November 2016, more than 53,000 consumers have used it to find policies for family members and estates, resulting in the recovery of more than $760 million. Search requests and basic identifying details on the decedent are submitted online through the NAIC website (https://eapps.naic.org/life-policy-locator), and the organization makes this information available to participating insurers (see the Exhibit). The insurance companies will respond to requests from designated beneficiaries or authorized representatives only if a policy is positively identified. Approximately one-third of all requests have resulted in a positive match, according to figures provided by the NAIC.
Past application activity.
Another useful source is the Policy Locator Service from MIB Group Inc., a not-for-profit organization that provides risk reporting and information sharing for insurance underwriting in the U.S. and Canadian markets. The MIB Policy Locator Service provides information on applications for coverage submitted to its 420 member companies dating back to 1996 (https://www.mib.com/fee_based_services.html). The results from MIB do not specify whether a policy was written or the extent of eligible benefits. Executors who receive a report of past application activity from MIB will need to follow up with the corresponding carrier to determine whether a policy was issued and in effect at the time of death.
Local agents and brokers.
A third alternative is contacting any local insurance agents listed on the decedent’s homeowner policies or automobile coverage declarations to inquire about other applicable coverage. Even agents who exclusively represent property and casualty carriers might have knowledge of relationships with life insurance companies through a past referral or conversation with clients.
Review of past checking account activity can identify premiums or other payments made to insurance companies, insurance agents, insurance brokers, or financial advisors. If the decedent did not retain checkbooks or related records, copies of past account statements can be requested from the bank or credit union. The executor should contact the bank official responsible for decedent accounts and request three to five years of statements.
Current and past employers.
If the decedent was employed at the time of death, the employer’s benefits department should have information on any applicable group insurance policies. Unions also offer similar benefits to their members. Term life policies offered to current workers will no longer be in force after the individual retires or changes jobs; however, group annuities, which are a component of some employer-sponsored retirement plans, may remain in existence, retaining their value long after the job has ended.
Direct inquiries with insurers.
Ten of the largest U.S. life insurance companies write 50% of all life policies and annuity contracts, in terms of total amount of direct premiums, according to data from the Insurance Information Institute (“Facts & Statistics: Industry Overview,” http://bit.ly/2PouHzP). Contacting their customer service and claims departments can help identify policies. A few of these companies, including New York Life (https://nyl.co/38IkAxt) and Lincoln Financial Group (http://bit.ly/34pDGVP), offer a lost policy locator service through their websites.
Less Reliable Methods
Other methods commonly used by estate representatives to identify financial accounts, such as those listed below, may not be particularly useful in locating life policies and other instruments. It is important to recognize the limitations of such approaches when inventorying assets, particularly in situations where no relevant information can be found in the decedent’s personal records.
The postal service.
Reviewing account statements as they arrive in the mail is one technique for identifying undisclosed assets. This approach is more applicable to discovery of bank and brokerage accounts, although even in that regard its reliability is declining; nearly 40% of Americans now primarily manage their bank accounts online, according to a 2017 survey from the American Bankers Association (“ABA Survey Shows American Prefer Online Banking,” MobilePaymentsToday.com, Sept. 21, 2017, http://bit.ly/34o7e6g), and financial institutions increasingly promote paperless billing.
Estate representatives and tax professionals should not place their hopes for locating life insurance policies in the postal service. Typically, the only notice sent for a term life insurance policy is an annual invoice for payment of the premium. If the premium was paid shortly before a death, and probate of the estate proceeds efficiently, there may be no further correspondence from the insurer until after the engagement ends.
Another option to identify financial accounts is to obtain copies of past federal returns from the IRS. The decedent’s Form 1040 and supplemental filings should capture interest-bearing accounts (Form 1099-INT), dividend-bearing accounts (Form 1099-DIV), retirement and profit-sharing plans (Form 1099-R), capital gains from the sale of derivatives and securities (Form 1099-B), and accounts for direct deposit or automated clearing house (ACH) transfer of tax payments and refunds (Form 8888). Copies of federal tax returns and attachments can be ordered from the IRS on Form 4506.
In terms of insurance products, tax returns can be helpful for identifying income from group annuity contracts and nonpension annuities as reported on Line 16 of Form 1040 and on Form 1099-R. Deferred annuity information will not be reported, however, if the taxpayer died before reaching the minimum age to receive distributions.
Due to the tax exemptions afforded to life insurance policies, a search of IRS income reports will not be helpful for locating such policies. Growth of a life insurance policy’s cash value is generally on a tax-deferred basis, and funds taken out as policy loans are not typically considered taxable income. Life insurance policies will not generally be itemized on past tax returns unless the policyholder closed a permanent life policy early and reported its cash surrender value (CSV) as income.
Funds from abandoned and dormant financial accounts have been piling up in state treasuries through escheatment, a catch-all process that places dormant assets into custodial keeping until a beneficiary steps forward to make a claim. The total balance of unclaimed funds in New York is $16 billion, according to the Office of the State Comptroller (https://www.osc.state.ny.us/ouf). Escheatment covers a broad range of assets, from investment accounts to retail gift certificates, as well as insurance-related instruments with cash value.
The dormancy period during which carriers can retain funds, absent a claim from a beneficiary, is three to five years in most states. If carriers have not received notice of a death, certain state laws have allowed them to wait until limiting age—currently, when the insured party turns 120 years old—before relinquishing funds to the state. This places escheated assets far outside the time frame of probate proceedings. In addition, term policies have no cash value, and the cash component of permanent or “whole” policies may be gradually reduced to zero if premiums are continually paid out of the cash reserve, leaving nothing to escheat.
Finding life insurance policies and annuities is not a simple undertaking if the decedent’s records are incomplete or inaccessible. With the right approach and a diligent search, however, executors can fulfill their fiduciary duty to locate every account, ensuring that all proceeds will be properly distributed to a decedent’s beneficiaries and heirs.