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Unclaimed Life Insurance Policies

Unclaimed Life Insurance Policies   Life insurance companies are among the largest holders of unclaimed assets and missing money. Generally it is the responsibility of beneficiaries to notify insurers of a policy owner's death. Because family members and heirs may not be aware a policy exists, or don't know which company issued it,  no action is taken. It's estimated as many as one-in-four policies go unpaid on death of the insured.

What happens to insurance payouts that are not claimed by beneficiaries depends on what type of policy was issued, and whether or not it was paid-up and in force at the time of death.

Term life insurance covers a designated number of years, while whole life policies span a lifetime. It's important to note polices can be in force even if the payment of premiums has stopped, or if money has been borrowed against the policy. Even cancelled polices can have some residual value based upon what type of non-forfeiture option is selected at the time of purchase.  

If a whole life policy was in force - either because it was fully paid or because premiums were current until death - beneficiaries receive the full policy value. There is no time limit on claiming a payout when the insured dies with a policy in force. If a claim is not made until some years after death, accrued interest is added.

But if benefits remain unclaimed until such time as the insured would have reached the limiting age on the mortality table, generally 100-115 years, the benefit may be considered legally abandoned. It then comes under the purview of state unclaimed property and escheat statutes, but in most cases heirs retain the right to reclaim the funds.

If the policy lapsed - if the insured ceased making payments some time before death, beneficiaries may receive either a reduced benefit or nothing at all, depending on the length of time since death. This is because underwriters often convert permanent policies to extended term policies (using the cash value at the time payments stop), or to reduced benefit paid-up permanent policies.

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Whole Life vs Term Life  As noted above, generally it is the job of the beneficiary to notify the insurer of a policy owner's death. If the company is not notified, what happens next depends on what type of policy was issued, and whether or not it was paid-up and in force at the time of death.

Permanent 'whole life' policies span a lifetime, while term policies cover a designated number of years. It's important to note polices can be in force if the payment of premiums has stopped, or if money has been borrowed against the policy. Even cancelled polices can have some residual value based upon what type of non-forfeiture option is selected at the time of purchase.  

If a permanent policy was in force - either because it was fully paid or because premiums were current until death - beneficiaries receive the full policy value. There is no time limit on claiming a benefit owed when the insured dies with a policy in force. If a claim is not made until some years after death, interest may be added. If benefits remain unclaimed until such time as the insured would have reached the limiting age on the mortality table, the benefit is considered abandoned and turned over to the state of last known residence of the insured or his/her beneficiary.  

If the policy lapsed - i.e. if the insured ceased making payments some time before death, beneficiaries may receive either a reduced benefit or nothing at all, depending on the length of time since death. This is because underwriters often convert permanent policies to extended term policies (using the cash value at the time payments stop), or to reduced benefit paid-up permanent policies.

Escheat  Financial assets are considered legally abandoned under state escheat and unclaimed property statutes after owners (or heirs) fail to 'communicate an interest' in them. Failure to communicate an interest in a life insurance payout can arise when beneficiaries neglect to claim policy benefits after death of the insured.

The length of time that must pass before an asset is considered abandoned, the 'dormancy period', is set by law. It varies with the type of property involved, but generally runs one to five years, except in the case of life insurance, which often has an extended dormancy period given its long term nature. 

If, at the end of the dormancy period, there has been no owner directed activity or contact, the insurance company must transfer the funds to the protective custody of a government trust account in a process known as 'escheat'. But because most state unclaimed property laws don't presume abandonment of life insurance benefits until some number of years after the insured would have attained the limiting age on the mortality table on which reserves are based (typically 100-115 years), this type of asset may not show up in a government unclaimed property database for quite some time. Some investigation, therefore, is necessary to trace and recover unclaimed policy benefits.

Note in 2011, after it was revealed major life insurers were sitting on billions of dollars in unpaid policy benefits owed beneficiaries of policyholders known to be deceased, the National Conference of Insurance Legislators (NCOIL) promulgated the Unclaimed Life Insurance Benefits Model Act, which stipulates using the Social Security Death Master File to determine whether, in fact, a policyholder is deceased.

If that is found to be the case,  insurers are to perform a good-faith effort to seek out and locate beneficiaries. In cases where location efforts are unsuccessful -  often when an heir has a name change after marriage or divorce, or an expired forwarding order after a move - the unclaimed benefits are considered abandoned and subject to reporting and remittance as unclaimed property.