Life Insurance Gets (Another) Black Eye

Caveat Emptor…let the buyer beware.  Caveat emptor should not apply when you buy life insurance to protect your family, but it most certainly does.

Imagine that you purchased a life insurance policy and you die while the policy is in force. Your family never collects because they don’t realize (or remember) that you had the policy.  “This couldn’t happen, you say.”  As it turns out, this happens all the time.

Here’s a simple scenario:  You purchase a $250,000 20-year term policy and set up premium payments through auto-draft from your checking account.  Your premiums are automatically paid like clockwork from your account.  Then you die.  Your surviving spouse (or children) then close your checking account as part of settling your estate not realizing you even owned the life insurance.  Sixty days later, the policy lapses due to non-payment.  They never even realized this happened.

Here’s an even worse scenario: You purchase a whole life policy and build up $10,000 of cash value.  You die without anyone realizing you had the policy.  There’s a provision in the policy that says if you don’t pay the premium, the insurance company will withdraw the premium directly from your cash values.  Over time, the insurance company draws out all of your savings until they are exhausted and then terminates the policy for non-payment.  You lost the death benefit and the savings!

What if I told you that in many cases, the insurance company actually knew you had died but still allowed your policy to terminate without ever notifying anyone…would you believe me?  Last year, ’60-Minutes’ the TV news journal, did an investigative report and discovered that twenty-five of the largest insurance companies settled a series of claims that together exceeded $7.5 billion in back-death claims.  Another thirty-five companies refused to settle and cases are still being fought out in the courts.

According to the report, insurance companies routinely used the Social Security Master Death File to determine policyholders who had died.  There was even one case where an insurance company had a policyholder who owned both an immediate annuity and life policy.  They used the information about the policyholder’s death to stop making the annuity payments but ignored the life insurance death claim and allowed that policy to lapse.

I know this makes no sense.  How can the insurance company get away with this?  When you purchased the policy, buried in the fine print, you signed an agreement that states the death benefit will only be paid if a death claim form is submitted.  Their perspective is that the burden is on the beneficiaries to request the benefits.

How to protect yourself:

  • Get with your spouse, parents, etc. and get a list of all policies with the pertinent information such as name of the insurance company, policy number, face amount, etc. Keep these records up-to-date at least every year.
  • If a family member dies, carefully check their bank account records for auto-drafts to insurance companies as well as their ‘bills paid’ records/files to see if there are any references to insurance companies.
  • If they were employed, be sure to check if their employer provided group life insurance. Many employers do so as a benefit for all employees, while some others allow employees to purchase group life insurance individually.  Some even provide ‘paid up for life’ policies for retired employees.