Nearly two years ago, Sharon Parks learned that her mother had taken out a life-insurance policy naming Parks and her two siblings as beneficiaries. The news came at an opportune time.
Parks, 43, of Durham, a first aid trainer who’s married with four children, was looking for ways to bring in more income. She used her $1,800 share to purchase adult and infant mannequins for CPR classes she teaches.
If not for a big battle between life insurance companies and state treasurers involving millions of these unclaimed policies, she might not have received any money for 28 more years.
“It’s amazing,” she said. “There’s a lot of people out there that would never see their money.”
That’s because a little-known practice within the life insurance industry allows many companies to hold onto unclaimed policies until the policyholder would have reached 100 years old, so long as those insurers have not been notified of the policyholder’s death. As a result, beneficiaries may not find out about policies that would have helped them cover burial services or other expenses until decades later – if they are still alive by then.
In recent years, roughly 20 life insurance companies, in national agreements with states, have promised to identify dead policyholders and pay out their policies or turn the money over to the states as unclaimed property. But other companies are petitioning state lawmakers across the country to pass a law that would shield them from having to do the same thing.
The company often leading this effort is Kemper, and in North Carolina, where the state Senate has already passed the company’s model legislation, a powerful local ally has emerged in N.C. Mutual Life Insurance Co. It is based in Durham and is one of the more prominent African-American-owned insurance companies in the country.
The legislation – Senate Bill 665 – would require these companies to begin regular death checks of policyholders for policies written after July 1, 2015. But the companies would not have to go through the tens of thousands of policies sold decades ago, which would mean they would only pay benefits on those policies if a beneficiary contacted them, or when the policy holder would have reached 100.
Only companies that used a Social Security death master file to shut down payments from annuity policies to people who had died would be subjected to audits of all of their policies. Kemper and N.C. Mutual say they haven’t done that.
Insurance companies pay out most of these policies in a timely fashion, but the small percentage that remains unpaid could be worth more than $1 billion nationally. In North Carolina, State Treasurer Janet Cowell estimates the Senate legislation could allow companies to hold on to more than $60 million in unclaimed policies. The life insurance companies that settled with the states in the past few years have returned a combined $4.4 billion in unclaimed policies to beneficiaries or to the states to hold in their unclaimed property funds.
Too much work?
State treasurers or controllers manage those funds – and provide searchable public websites that connect beneficiaries to the policy proceeds. That’s how Parks found out about her mother’s policy, after it had been turned over by MetLife as part of its settlement with state treasurers.
Cowell’s department sent a memo to N.C. House members in May calling the Senate legislation a “money grab” by insurers.
Kemper and N.C. Mutual see the issue differently. Kemper has roughly 100,000 and N.C. Mutual 150,000 small life insurance policies in North Carolina that reach back into the first half of the 20th century.
They see the potential for expensive audits ahead if the state legislation does not pass, forcing them to identify dead policyholders and then turn over the proceeds of unclaimed policies. Insurance laws in North Carolina and other states place the burden on beneficiaries to notify insurance companies when a policyholder dies, but the Treasurer’s Office can audit the companies to make sure they are turning over unclaimed policies in a timely fashion.
“If companies that write these small ... policies have to do this, and that makes some of them insolvent and they have to turn in their license, then there’s going to be an entire section of the population that’s not going to have access to life insurance,” said Robert Wooley, a former Louisiana state insurance commissioner now working for Kemper as a consultant.
Kemper and other insurance companies have persuaded lawmakers in Alabama, Arkansas, Georgia, Indiana, Mississippi, New Mexico, Tennessee and Utah to pass laws similar to the North Carolina legislation. On the flip side, at least 10 states have passed laws requiring every company to identify all unpaid policies.
In some of those 10 states, and others such as California, Kemper and other insurance companies are waging legal battles with state treasurers to prevent them from auditing their records to identify deceased policyholders. An appellate court in Kentucky sided with insurance companies last year, while a recent decision in West Virginia’s appeals court went against them.
N.C. Mutual officials provided access to the company’s basement in downtown Durham to show how difficult it would be to identify dead policyholders. Dozens of cabinets were stuffed with index cards that contain a name, policyholder’s age at the time of sale, address, policy number and date the policy was taken out.
The index cards lack two of the three pieces of information that would make for an easy match to a death database: a Social Security number and a birth date.
“Take a common name – a John Jones,” said James Speed, N.C. Mutual’s president and CEO. “There could be a thousand John Jones in here.”
Those records cover the start of the business in 1898 and go into the 1960s. N.C. Mutual didn’t start putting policy records on computer until the 1990s, and it has not taken steps to digitize policies sold before the mid-1960s.
The index cards reflect the history of these policies, which many companies stopped selling by the end of the 1960s. These were “industrial life policies” that workers bought. They paid about a dollar a month to insurance agents who knocked on their doors or showed up at factory gates.
Cowell, a Democrat, bristles at the thought that across the country, millions of the policies never paid out.
“Think of the hardship to these people, putting those quarters in every month to do this policy, thinking they were trying to take care of their families,” Cowell said in an interview. “I mean, it’s really a travesty.”
She said she has offered to give N.C. Mutual more time to do the work, to reduce the cost of finding unpaid policies.
There’s a secondary benefit to North Carolina and other states. If the companies go through their books and settle the old policies, the states’ unclaimed property funds stand to gain millions of dollars. In North Carolina, that money helps provide scholarships for financially strapped students.
For many years, the state treated the fund like an endowment. Any money spent came from returns on investment. But in 2004, state lawmakers began dipping into the fund to pay for the scholarships. It now sits at $438 million; Cowell estimates it would have been roughly $1 billion today if lawmakers hadn’t tapped into it.
The movement toward finding dead policyholders began in the 1990s, when some life insurance companies decided to switch from being owned by their policyholders to becoming publicly traded. That process required insurance companies to reimburse the policyholders for their piece of the company.
The companies discovered they couldn’t find many policyholders and began sending their shares to the states as unclaimed property. That raised an important question for many state insurance commissioners and treasurers, and two entrepreneurs with experience in complex financial matters – lawyer James Hartley Jr. and Jeffrey Drubner, a former FBI agent.
If the policyholders couldn’t be found, they were likely dead. And that meant life insurance benefits hadn’t been paid to their beneficiaries.
Hartley and Drubner formed a firm that would audit insurance companies on behalf of states to identify these unclaimed policies. That firm, Verus Financial of Waterbury, Conn, now does this work for 47 states, including North Carolina. The company is fighting the Senate legislation.
The audits found some companies were using the Social Security Death Master File to identify holders of annuity policies who had died while annuity payments continued. In other words, they used the death database when it saved them money – and didn’t when it would cost them.
The work also showed that some companies ignored obvious signs a policyholder had died. Premium payments would stop, and these insurance companies, instead of trying to determine whether death was the cause, would dip into the cash value of the policies to continue the payment.
Continuing a policy by paying premiums out of the cash value is actually a consumer protection required by many states to give the policyholder time to keep the coverage in place, but in these cases it had the opposite effect.
Once the cash value was gone, the policies had no value and the companies closed them out. The beneficiaries would have received nothing. The agreements required those companies to pay what the policies were worth at the policyholder’s date of death.
Kimberly Moore, N.C. Mutual’s vice president of marketing, said some of the company’s older policies have been emptied because premiums were paid out of the cash value. It’s unclear how many of those policy holders stopped paying premiums because they had died.
“Your family is required to let us know that to file a claim,” she said.
Hartley said some companies have since taken their own initiative to identify dead policyholders.
“The insurance industry has been good in most cases,” Hartley said. “There have been some companies that don’t want to look in their book of business to see who’s dead, but that’s the outlier.”
In the House
The North Carolina legislation is sponsored by Sen. Tom Apodaca, a Hendersonville Republican who chairs the Rules Committee. The bill passed easily and drew little discussion. Cowell’s objections were noted.
It’s now before the House. Its first stop is a judiciary committee led by Rep. Leo Daughtry, a Smithfield Republican.
“I’m very apprehensive about the bill,” Daughtry said. “I don’t know that I know enough to be against it, but I’m very apprehensive.”
One of the groups lobbying Daughtry to pass the bill is the American Council of Life Insurers, a Washington, D.C.-based interest group. It sent him a letter in June saying the Senate bill is “based upon model guidance provided by the National Council of Insurance Legislators.”
That council’s model legislation, however, calls for insurance companies to audit older insurance policies.
The insurance legislators council “has always intended for its model to apply both retroactively and prospectively – applying the model to ‘in-force’ policies, contracts, and retained asset accounts and not just to transactions that take place after some future date,” Candace Thorson, the council’s deputy executive director, wrote in an email.
State Insurance Commissioner Wayne Goodwin has been on the sidelines through much of the debate. He said he “generally supports” the Senate legislation, though he said part of it should be changed: A provision that he says gives insurance commissioners too much latitude in providing a hardship exemption to companies.
But it also troubled him that insurance companies routinely held on to unclaimed policies until the policyholder would have turned 100 years old. Goodwin was first elected in 2008, but he said he didn’t learn of the practice until recently, as a result of the debate over the legislation.
“I do think that is unfair,” Goodwin said. “I do believe that is a much longer amount of time than one would expect.”
What you should do
Taking out a life insurance policy? The best way to make sure your loved ones receive the money when you die is to tell them in person, in your will and by having a copy of the policy in a secure place, such as a bank deposit box.
Here’s how to check whether you are a beneficiary:
The State Treasurer has a website, nccash.com, that is searchable by name or company. If your name has changed through marriage or other circumstances, make sure to check under those names as well. You can also search by policyholder’s name, which is important since parents may have listed a “son” or “daughter” as the beneficiary. Think also about where you, your parents and grandparents have previously lived and search those states. The National Association of Unclaimed Property Administrators has a website, naupa.org, that links to all states’ funds.
Last year, the State Department of Insurance created a website for the public to simultaneously contact all insurance companies doing business in North Carolina to see if they have policies identifying them as beneficiaries. It’s called the “Lost Life Insurance and Annuity Inquiry Service,” and can be found at www.ncdoi.com/consumer/consumer_life_lost_policy.aspx.
The “maturing age”
For decades life insurers have sold policies that have a “maturing age” that represents the outer limits of life expectancy. That’s when companies expect the policyholder to have already died, requiring them to try to confirm the death and send the money to the beneficiary. The money goes to the state as unclaimed property if the beneficiary can’t be found.
Some policies pay the policyholder if he or she is still alive.
In many cases, the maturing age is 100, but that’s likely not explained on most older policies, said Robert Wooley, a Kemper consultant and former Louisiana insurance commissioner.