Life Insurers Cancel Policies After Death

As if the insurance industry didn’t have enough bad press, it’s just gotten more. An article in the Sunday Los Angeles Timesis taking a look at the practice of rescission—canceling insurance coverage after a policy has been issued—as it’s playing out in the cases of some beneficiaries who were denied benefits when the policy owners died.

The report cites several cases, naming large insurers, and circumstances that are by now all too familiar in the headlines: sympathetic family member denied benefits after everything was thought to be in place. The companies are defending their practice, pointing out that they have a responsibility not to pay policies obtained with “material misrepresentation”—omitting information the insurer deems crucial to the decision to issue a policy. The law in California and in some other states allows companies a two-year window for rescissions after the policy is signed.

The report says that withheld death benefits have more than doubled in the past 10 years, to $372 million in 2009, according to data compiled by the NAIC and analyzed by The Los Angeles Times. It also says that some companies “deny benefits far more than others,” using that two-year window as a “‘gotcha period,’ seizing on flaws after claims are made that they could have looked for before issuing coverage.”

On the other hand, one company, Minnesota Life Insurance Co., “reported no disputes last year and no rescissions for three years on individual death claims.” It takes more than two months, on average, to review applications and will also take a further look at medical records in about a third of cases. Craig Frisvold, a vice president at parent company Securian Financial Group, said in the report, "The more information you get, the less surprises there are and the less rescissions there are."