Back in the days of captive insurance agents, when the agent was personally acquainted with his customers, it was fairly simple to be sure beneficiaries received death benefits and annuities stopped on the death of the annuitant, according to Todd Eyler, research director for Aite Group's insurance practice. In fact, sometimes beneficiaries weren't even aware that they were due a benefit until the agent made sure it was paid.
“The captive agent from Prudential or New York Life or MetLife knew your kids, your family. [The agents] would contact the company [for you] and everything was taken care of,” said Eyler. “But the trend is away from captive relationships to direct sales. Changing names, divorces, people changing addresses every seven years [makes that much more difficult.]”
Not that it was the insurance company's job to find beneficiaries. According to the Aite Group's recent report “Unclaimed Death Benefits: Technology Aspirin for a Big Headache,” which Eyler authored, “state insurance laws do not require life insurers to determine when a policyholder has died, locate beneficiaries and instruct them to file a claim, or pay a claim in the absence of a valid death certificate.” That meant unclaimed death benefits sat on a company's books and in its investment accounts, saving it money and perhaps even earning some.
States got involved in whether, when and how insurers tracked down beneficiaries in the wake of the financial crisis. Since 2011, according to Aite's report, states “have focused on unclaimed property in general and unclaimed life insurance death benefits in particular as a way to help generate additional revenue.” They ran into a little problem with that, however.
Insurance companies were using the Social Security Death Master File—the database used to “deny Social Security benefits to the deceased”—to determine when annuitants had died so that benefits could be stopped. But insurers were not engaged in the same level of due diligence to find beneficiaries of life insurance policies. Instead, Aite's report said, “state investigations found that many life insurers had used this database to confirm that annuity contract holders had died, allowing the insurer to stop payments, but had not used the same data to pay out death benefits due to rightful life insurance beneficiaries.”
What followed, according to Aite, were “[u]nclaimed property audits, multistate regulatory settlements and class-action lawsuits surrounding unclaimed life insurance benefits.”
But even companies that proactively search out beneficiaries can find themselves stymied by the very source of information they rely on. The Death Master File is, to put it mildly, less than accurate. Eyler wrote that the file does not include people who are not receiving Social Security benefits; railroad and state public employees; and, since November 2011, data sent to it between 2002 and 2011 by the states’ vital records agencies “for privacy reasons.”
Furthermore, the SSA maintains two files. The complete file is accessible only to the SSA and approximately six other federal agencies. The “public” file—excluding about 60% of the data—is accessible to entities such as insurance companies.
To top it off, access to the file has been restricted to protect against identity theft. The file has been publicly accessible, usually for a fee, since 1980. The Budget Act of 2013 allowed access for “certified users” for a fee, but what constitutes a certified user is still being decided.
The financial services community has gone so far as to form the Coalition for Implementation and Reform of the Death Master File to ensure that the requirements for user certification will not block insurers and others with legitimate purposes from gaining access to the file.
Eyler's report provides insight into another aspect of the problem: the potential for insurers to outsource the search for beneficiaries and even the contact with them once they have been found.
Said Eyler, “Even if you can confirm that someone has passed on, [the next step] is contact.” There's a credibility factor if a beneficiary gets a call out of the blue “saying, ‘Someone has died and you’ll be paid half a million dollars.’ Some [outsourcing] companies do a pretty good job” of that, but beneficiaries “need someone to connect with them in the right way.”