How to Collect on Lost Life Insurance Policies

A relative has just died. He had a life insurance policy with you listed as the beneficiary. There’s just one problem: the life insurance policy is missing. You have no idea which insurance company wrote it.

If you find the missing life insurance policy in the future, are you still eligible to receive the death benefit?

Hope they paid their insurance bills

If you’re a beneficiary and you find the lost life insurance policy shortly after the insured dies (within six months to a year, for example), claiming the death benefit should be trouble-free.

First, determine if the insured had term or permanent life insurance. If the insured held a term policy, you’ll receive the death benefit if he died before the end of the policy term. If he died after the policy expiration date, you would get nothing.

If the insured had a permanent life policy, you’ll receive the money if the death occurred while the policy was “in force,” meaning all premium payments were made up until the time of death. If the death was a while ago, you’ll receive the benefit with interest from the date of death.

If the life insurance policy lapsed — meaning the insured stopped making premium payments before he died — there’s a chance you might get nothing. When a permanent life insurance policy lapses, most insurance companies switch its status from permanent insurance to one of two options:

“Extended term” — The insurance company uses the cash value of the policy to buy a term life insurance policy for the same death benefit using the cash value of the policy. The death benefit will continue for the longest period the cash value will purchase.

“Reduced paid up” — The insurance company will keep the policy in force permanently, but will reduce the death benefit.

Gerry Brogla, an actuary for State Farm, says in the majority of the cases at his company, the permanent policy continues as extended term if it lapses. At State Farm, extended term is the default option for most permanent policies.

If the policy lapses, and the extended-term period expires before the insured dies, the policy is worthless and the life insurance beneficiary will get nothing. If the insured dies before the extended-term period is up, the beneficiary will receive the death benefit. If the policy lapsed because the insured died (thus ending premium payments and causing the insurance to be placed in extended-term status), the beneficiary will still collect the full death benefit, regardless of when the extended term was up. The beneficiary always needs to supply the insurance company with a death certificate to verify the date of death.

There is no time limit during which a life insurance beneficiary must step forward to collect the money, according to Jack Dolan, spokesman for the American Council of Life Insurers. “If a person shows up 30 years after [the insured's] death, the company still makes good on it,” Dolan assures.

What happens if no one ever reports the death?

If the insured dies and the insurance company does not learn of the death, the policy lapses. Insurance companies will take steps to find out why a policyholder stopped making payments.

When an insurance company stops getting payments, it sends letters to the insured informing him the policy may lapse as a result of unpaid premiums. If the letters go unanswered, the company might initiate a search to find the insured. If that comes up empty, the company will then lapse the policy.

If a beneficiary to a policy never steps forward, it unfortunately means the insured paid money to a policy throughout his life and his beneficiaries never see a penny. This is why its a good idea to make sure beneficiaries are aware of any life insurance policies you have.

If you’re lucky, the state may have your money

In some cases when a beneficiary fails to claim a death benefit for several years, the money is transferred to the state where the insurance policy was purchased under the escheat laws.

If a company knows an insured died and it cannot find the beneficiary, it must turn the full death benefit over to the state comptroller’s department within three to five years of the insured’s death. The money is transferred to the state where the insured bought the policy. The money is considered “unclaimed property” and gets lumped in with dormant bank accounts and uncollected rent deposits. The comptroller’s department maintains a database that lists the names and addresses of lost life insurance beneficiaries.

Many states will try to contact life insurance beneficiaries in an effort to pay the death benefits. In Texas, for example, the names and addresses of the beneficiaries are published annually in each county in the state. In New York, the Web site of the New York State Comptroller’s Office of Unclaimed Funds has an online search to find any unclaimed death benefits owed to you. You can find out the procedures in your state by contacting the office of your state comptroller or treasurer.

Keep in mind your chances of finding the policy with the state are slim. The insurance company has no obligation to hand the money over to the state if it’s unaware the insured died. In most cases, it’s the beneficiary who contacts the insurance company.

Also, the insurer only transfers the money to the state three to five years after it cannot find the beneficiary but knows the insured died. If the state doesn’t have the death benefit, it’s likely the insurer is still looking for the beneficiary or doesn’t know the policyholder has died.

Unclaimed death benefits are rarely transferred to the state. Dave Potter, a spokesman for Hartford Life, says less than 1 percent of his company’s death benefits go unclaimed.

Del Chance, a life insurance claims manager at State Farm, says, “Turning over life policy benefits to an individual state after the death of an insured is extremely rare. State Farm utilizes their own search techniques as well as outside vendors to locate lost beneficiaries in the event of the death of one of our insureds. By and large these procedures have always located the beneficiary.

Tips for making sure your life insurance beneficiaries get your death benefit:

1. Give your beneficiaries your policy information. It can be a difficult and awkward conversation, but an important one.

2. Keep all your financial records (especially your life insurance policies) in one place. Don’t force your beneficiaries to search your house from top to bottom after you die.

Tips for looking for lost life insurance policies:

1. Go through canceled checks or contact your relative’s bank for copies of old checks. Look for checks made out to insurance companies.

2. Ask those who may have known about your relative’s finances. Speak with the relative’s lawyer, banker or accountant. Also contact the relative’s insurance agent.

3. Contact your relative’s past employers. They might know of possible group life insurance. The insured might have also purchased supplemental life insurance through work.

4. Check the mail for a year. Premium bills and policy-status notices are usually sent annually.

5. Look at income tax returns for the past two years. Check for interest income from policies or expenses paid to life insurance companies.

6. Contact the Medical Information Bureau. If your relative bought life insurance fairly recently, there might be a trail of the companies to which he applied. The Medical Information Bureau (MIB) maintains a database that might show if insurers requested your relative’s medical information within the past seven years. Record searches can be requested through the MIB’s Policy Locator Service and cost $75. The MIB says that nearly 30 percent of searches turn up leads.

Scared To Death Of Life Insurance

Life insurance may be the most badly purchased financial product. Some people, unwilling to face the thought of death, never buy coverage at all. Others feel guilty about the prospect of leaving loved ones behind and buy too much. Even those who put their emotions aside tend to fall back on oft-repeated and oft-wrong rules of thumb, such as buying a policy worth five times your annual salary.
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Choosing the right amount of life insurance is no easy matter. Even most insurance agents and financial planners rely on rules of thumb or unsophisticated worksheets — or put the onus on clients to decide how much insurance to carry. Fortunately, understanding a few economic principles will go a long way toward helping you make a smart decision.

According to economists, your family’s financial goal should be to enjoy the highest standard of living possible over a lifetime. That may mean borrowing when you’re young and repaying the loans as you age and earn more. Given your total lifetime income, you don’t want to suffer in youth and live high on the hog in old age, or vice versa.

That’s where life insurance comes in. If you die, the death benefit to your survivors should be precisely large enough so they enjoy the same living standard as they did while you were alive. Life insurance protects your family if you die young. It goes hand in hand with investing for retirement, which protects you against the opposite risk: that you and your spouse will outlive your savings.

The focus on smoothing consumption over a lifetime leads to some counterintuitive conclusions. It indicates that young people are the most likely to be underinsured, that secondary earners and nonworking spouses are the most likely to be overinsured, and that most people should reduce the amount of life insurance they carry as they approach retirement. “When it comes to buying life insurance, economic man is making major mistakes,” economists Jagadeesh Gokhale, a senior fellow at the Cato Institute, and Laurence Kotlikoff of Boston University wrote in a 2002 paper.

Gokhale and Kotlikoff have done more than chastise people for bad decisions. They have distilled their research into a sophisticated program that digests scads of personal data and spits out a multiyear financial plan with annual targets for spending, saving, and insurance coverage. The calculations are so complicated that even a state-of-the-art PC takes 15 seconds to produce a result. The $149 program, ESPlanner, is sold by a company that Kotlikoff helped found, Economic Security Planning Inc. in Lexington, Mass.

Even if you don’t buy the program, you can learn a lot by looking at life insurance through an economic lens. Start with what economic theory says about the young. Many people who are starting families buy a little life insurance coverage, then add more as their incomes increase and they can afford more protection. That’s the opposite of what you should do. You want the most coverage when you have just started a family, because the insurance has to cover decades of future earnings that will be lost if you die. As you get older, you can afford to decrease coverage because you have fewer years of earnings to make up for, your spouse has more assets to live off of and fewer years of life remaining, and your children are closer to being on their own.

YOUNG IDEA
Those factors have big implications for what kind of insurance is appropriate. Insurance agents often advocate cash-value policies because they double as investment vehicles. With simple term insurance, they argue, you’re left with nothing to show for your years of premium payments. That’s true. But the only way most young people can afford to buy as much life insurance as economic theory says they need is to opt for term policies that pay a death benefit and nothing more. A 25-year-old can buy a $2 million, 30-year policy from a reputable insurer for about $1,600 a year. That same premium would buy a death benefit of only a quarter as much — $500,000 — if it were put into a variable universal life policy that has an investment feature. Younger people should place protecting future income ahead of piling up savings, but many succumb to agents’ sales pitches for cash-value policies. According to the latest available numbers from the American Council of Life Insurers, whole, universal, and variable life policies account for 84% of premiums, vs. only 16% for term policies.

Thinking like an economist can sometimes lead you to buy less insurance, not more. In ESPlanner’s software, secondary earners often require little or no life insurance, even taking into account that the secondary earner (most often the wife) often provides essential services that must be replaced, such as child care. Why? Mainly because child care is a relatively short-term issue. When the secondary earner is gone, the need to support that person until, say, age 95 is gone, too.

If you want to follow economists’ advice and reduce your coverage as you approach retirement, inflation will take care of part of your problem by eroding the real value of your death benefit. A $2 million policy will be worth just $1.1 million in today’s dollars in 20 years, assuming 3% inflation. Also, some insurers offer policies that have level premiums but declining coverage over time.

A good way to shrink your coverage over time is to buy policies of different durations and layer them. If you want to start with $1.5 million in coverage and then have it decline, buy three $500,000 policies. Make the first expire after 10 years, the second after 20, and the third after 30 years. That will give you a smoothly declining amount of coverage as you glide toward retirement.

No one enjoys buying life insurance. But if you think like an economist, you can come away feeling like you’ve at least correctly calculated the odds.