Numerous states are currently examining certain claims procedures of life insurance companies.  In its most basic form, life insurance is designed to provide a death benefit to a named beneficiary upon the death of the insured life.  State law generally requires that carriers disburse death benefits to the named beneficiary in a timely manner, or, if the beneficiary cannot be located after due diligence, submit the payment to the state under the applicable escheat law.  State regulators are currently examining the manner in which life insurance companies investigate and determine whether a particular insured is deceased, and locate beneficiaries.

One example of such an investigation was undertaken by the California’s State Comptroller.  It related to a particular insurance company’s practice of using the cash value of policies to cover premium payments, instead of investigating whether the insured was deceased.  Some types of life insurance policies contain a feature to protect against automatic lapses by allowing policy premiums to be paid from the cash value of the policy when the policyholder fails to make a payment.  Here, the life insurance company applied the cash value of the policy towards the premium upon the first missed payment, and continued to do so until the policy reserves were depleted.  No death benefits were paid out, and the insurance company never investigated whether the insured was deceased, operating under the premise that it had no obligation to do so until the beneficiaries or the estate of the insured made a claim.  California disagreed.  Ultimately, the investigation resulted in a settlement.  Among other things, the insurer agreed to restore the full cash value to over 6,400 policies, and to develop procedures for identifying deceased policyholders and locating beneficiaries.  The company entered into settlements with 21 other states, and the District of Columbia.

Note that a number of other life insurance companies have been subpoenaed by various jurisdictions in connection with their claims practices.

We will continue to monitor this topic and provide further updates on InsureReinsure.com