Life insurance is necessarily altruistic. Instead of protecting an asset of your own—like a car, a home, or an iPhone—you're protecting someone else's asset: yourself. Life insurance acknowledges your value to others and protects their financial interest in a way no other kind of insurance does. This is why the story of millions of unpaid life insurance claims touched a nerve with so many Americans. It feels like robbing someone not of a possession, but of a final gift.

Hundreds of millions of dollars in life insurance benefits go unclaimed every year. Consumer Reports estimated in 2013 that your odds of being the beneficiary of a forgotten life insurance policy are about 1 in 600. The movement to get these benefits into the hands of rightful beneficiaries has changed the face of the life insurance industry. Companies that have been in business for over a century have changed practices that had been in place since their inception. They’ve also been forced to pay about $7.5 billion in settlements.

What set these sweeping changes in motion? A tiny, unknown auditing firm that saw an opportunity in decades of oversight.

The Discovery of Unpaid Benefits

Outstanding life insurance policies weren’t just a welcome surprise for beneficiaries. State treasuries made billions. Thanks to the Uniform Unclaimed Property Act (UUPA), intangible yet valuable property (like a bank account balance) that’s unclaimed or abandoned must be relinquished to the state after a designated period of time. This includes uncollected life insurance benefits. It also includes shares of stock.

A process called “demutualization” swept through the insurance industry in the 1990s. It created a great deal of new stock. The trail to discovering unpaid benefits began with unclaimed stock.  

The Demutualization Wave

“For many years in the US most life insurance companies were mutual in their form,” explains Joseph M. Belth, professor emeritus of insurance at Indiana University. “A mutual company is one that is owned by the policyholders, and—at least in theory—operated for the exclusive benefit of the policyholders. In the 1990s, many of these companies decided to convert themselves into stock life insurance companies. These are owned by shareholders and operated for the exclusive benefit of shareholders. The conversion process is called demutualization.”

Belth says four things were necessary for these companies to demutualize:

  • The state in which the company is based must permit demutualization
  • The company must get permission from the state’s insurance regulator
  • They must get the policyholder’s permission (by majority)
  • They must compensate the policyholders in the form of shares, cash, or both

Prior to demutualization, Belth says, policyholders receive an “elaborate booklet” that is “typically 50 to 100 pages of finely-packed print” asking for approval to go public. “Most policyholders, I believe, do not respond,” says Belth. “The executives and employees of the company might even outnumber those who would possibly oppose the plan and respond.”

The life insurance companies MetLife, Prudential, and John Hancock demutualized during this time. At this point these companies had been selling policies for over a hundred years. Millions of their policyholders had bought what were called “industrial” policies. These had been sold around 1900 to the early 1960s. These policies were typically worth less than $500, sometimes as much as $1,000. They were only meant to cover the cost of burial. An insurance salesman would collect premiums door to door weekly or monthly.

This collection method became prohibitively expensive for the life insurance companies. The balance of a few hundred dollars wasn’t worth the manpower it took to collect. Most companies declared industrial policies paid in full. But when they stopped collecting premiums, the insurers no longer had a reason to track the policyholders’ whereabouts.

When these companies demutualized in the 1990s, they had to compensate policyholders. MetLife, Prudential, and John Hancock owed billions of dollars to people holding industrial policies. Unfortunately, their address books were way out of date.

Millions of policyholders couldn’t be found, and unclaimed property goes to the state. The life insurance companies turned over about $4 billion worth of assets to the government. But that was just the value of their stake in the demutualized company. The value of their policies remained.

Cash-Strapped States Catch On

Enter that clever little auditing firm. A Connecticut lawyer named James Hartley Jr. founded Verus Financial LLC in 2007. The housing crisis had just hit and the Recession had just begun. States were desperate for revenue. Verus had an answer, and by 2013, they were representing 46 states in some of the biggest settlements the industry has ever seen.

Hartley realized that many missing policyholders were probably dead. If Verus could verify those deaths, the life insurance companies would owe billions more in unpaid death benefits. Some of those assets would be paid out to the rightful beneficiaries, but those beneficiaries would be hard to find. Most of the money would revert to the states. It was a win-win in terms of public relations: the state unites survivors with their intended death benefits, and they get a new revenue source that doesn’t raise taxes.

Verus Financial offered more than the idea. They had a way to find out which missing policyholders were dead. Verus teamed up with a former FBI agent and a team of computer programmers. Their database expertise made it possible to search the Social Security Death Master File.

The Death Master File is a database created from all deaths reported to the Social Security Administration. Though it’s not perfect, it’s pretty good. It’s also dense. Verus’ programming team came up with search algorithms to match recorded deaths to lost life insurance policyholders. They handed this information over to the states. The states would collect the unclaimed property from the insurance companies. That is, minus the 10.5 percent the enterprising Verus charged for the service.

By April 2016, 25 of the nation’s biggest life insurance companies had agreed to pay $7.5 billion in unclaimed death benefits to the states. The states would then try to identify as many missing beneficiaries as possible. For the most part, the insurance companies settled willingly. But the real scandal wasn’t that the companies had dead policyholders on their books. Verus’ investigation revealed something that was a little harder for the public to swallow: many companies were already using the Death Master File. They’d only identify a policyholder as dead when it meant saving money, not paying it out.

Ethically Dubious Behavior

“Life insurance companies not only sell life insurance, but many of them sell what we call life annuities,” says Belth. “An annuity is a series of payments to someone known as an annuitant. An annuitant might receive, for example, $1,000 a month every month for as long as they live.”

With pensions becoming rarer and rarer, purchasing an annuity is a way of ensuring you’ll have money to live on until your death. Unfortunately, annuity abuse is not uncommon. Survivors often continue to collect annuity payments—along with social security benefits, disability checks, and even farm subsidies—after the rightful recipient is dead.

“Insurance companies were using the Death Master File to find out if annuitants were dead so they could stop their payments,” says Belth. “But they were not using the Death Master File to find out if they should be paying death claims to survivors. That struck a raw point with a lot of people who thought that was unfair.”

A 2016 60 Minutes report on CBS elevated public scrutiny. This report included a conversation with Kevin McCarty, Florida’s chief insurance regulator at the time. McCarty said they “have actual cases” where a policyholder had both an annuity and a life insurance policy with a company. The company would cancel the annuity without paying out any benefits on the life insurance policy.

It gets worse. Many life insurance policies are “whole life policies.” These build up a kind of “nest egg” cash value. After cancelling the annuity, the insurance company would continue to pay itself premiums on the policy from any value the whole life policy had accumulated. McCarty pointed to an example where the policyholder accumulated $9,000 in equity on their $20,000 policy. After their death, the insurance company withdrew payments from this $9,000 in equity. When the account had zero value, they closed it.  

California Controller Betty Yee estimates that in a third of the cases of unpaid benefits they investigated, there was “evidence of death in the file.” This includes “evidence” as bold as the word “DECEASED” written on a file in large letters, or even the date of death.

Policyholders and insurance officials were outraged that insurance companies had been using the Death Master File to verify deaths only when it benefited their own bottom line. But there had never been any precedent to do otherwise. The question became one of responsibility. It can’t be the policyholder’s responsibility to file a life insurance claim. They’re dead. Does the company have a responsibility to the beneficiaries to make every effort to see a claim collected?

From the Insurance Companies’ Perspectives

Dr. Steven Weisbart, senior vice president and chief economist at the Insurance Information Institute (III), believes the industry’s problem with lost policies is due partly to the nature of the life insurance industry. A lot can change in the course of a policy.

Policyholders are Living Longer

“Life insurance contracts are enormously long in their duration,” Weisbart says. “It’s not unusual for someone to buy a contract and have it be in force for 50 years. This is unlike virtually any other financial instrument people use routinely… We are also living much longer than we used to. In the past, if you bought a policy when you were 35 years old, you might die by 70 or 75. These days, people are commonly living to 90, 95, or longer. You have an increased likelihood of policies being bought many, many years ago.”

It’s easy to forget a life insurance policy worth a few hundred dollars you may have taken out 30 years ago. It’s even easier if your health is in decline.

“When they were younger and had all their faculties, they may have planned on telling people, ‘Oh, by the way, if I die this is money you should collect,’” says Weisbart. “Given a loss of cognitive power, they may not be able to convey this information at the appropriate time.”

Weisbart isn’t wrong. The Alzheimer's Society claims that the risk of developing Alzheimer’s or vascular dementia doubles every five years after the age of 65. Dementia affects one in 14 people over 65 and one in six over the age of 80. Unless it’s documented, a life insurance policy can easily fall through the cracks.

Inside the Insuring Agreement

It’s easy to understand how policies get lost. But that doesn’t make it feel less icky that insurance companies might have known policyholders were dead and chose to ignore it. But when you look more closely at the insurer agreement, it gets harder to fault the companies with anything more than pragmatic capitalism.

The insuring agreement is essentially the life insurance contract. It outlines the nature of the coverage and summarizes the insurance company’s promises. In these contracts, the underwriters never agreed to investigate the policyholder’s potential death. And they definitely never agreed to hunt down beneficiaries.

“The insuring agreement in the life insurance policy essentially says, ‘We will pay the death benefit to the beneficiary upon receipt of due proof of the death of the insured,’” Belth says. “This means that the survivors are supposed to file a claim. There is nothing in the contract that obligates the insurance company to search the Death Master File or any other file, or to watch obituary pages in every newspaper in the country, in order to detect people who have died who might own policies.”

Weisbart agrees. “Homeowners insurance doesn’t say that the insurance company will monitor the fire department to find out if you had a kitchen fire,” he says. “Auto insurers are not going to check the motor vehicle bureau to find out if you had an accident… Up to now, the obligation to notify the insurance company has been on the beneficiary and insurance companies have responded when notified.”

Weisbart and Belth both say they have never personally encountered any evidence of a case in which the company knew for certain a policyholder was dead yet refused to pay benefits. Belth also argues that it’s impossible to know what goes on inside an insurance company. If some low-level worker or automated program were searching the Death Master File for annuitants, why would they crosscheck the deaths with life insurance policyholders without being told to do so? A file might read “DECEASED,” but that doesn’t mean it was ever seen by human eyes, let alone by someone in a decision-making position. What does it mean to say that a company “knew” a policyholder was dead?

It is unsurprising insurance companies did not check the Death Master File for life insurance policyholders. There was no legal mandate, public outcry, or precedent compelling them to do so. They would essentially be filing claims against themselves.

Yet as Weisbart says, life insurance is unlike any other financial instrument. Since Verus uncovered millions of unpaid claims, change has come swiftly to the industry. Searching the Death Master File for dead policyholders is now standard practice.

Industry-Wide Changes for Unclaimed Benefit Pay

Insurance law is not federal. It varies state to state. This has made regulation difficult and slow. But in the handful of years since Verus Financial started digging, much is changed or changing.

The National Conference of Insurance Legislators (NCOIL) passed a major resolution in 2011 regarding beneficiary pay. Their Model Unclaimed Life Insurance Benefits Act was a blueprint for states to base legislation upon. It required life insurance companies to:

  • Search the Death Master File (or similar database) for potential matches with policyholders on at least a semi-annual basis
  • Within 90 days of a match between a person on their policyholder list and the Death Master File, the insurer must:
    • Make a documented “good faith effort” to confirm the death against other available records
    • Determine if benefits are due
    • Make “good faith efforts” to locate the beneficiaries
    • Provide the beneficiary with information and forms required to file a death certificate

This Model Act also requires insurers to check for things like nicknames, maiden names, incomplete social security numbers, or transposed dates to cast an even wider net.

As of 2015, 19 states had passed unclaimed life insurance benefit legislation similar to this Model Act. Six others have legislation pending. The National Association of Insurance Commissioners (NAIC) is currently drafting their own model law. It is only a matter of time before it’s illegal nation-wide not to check for dead policyholders.

Changing the Message

The national conversation about death claims has been fiery. But there still isn’t enough talk around the kitchen table. We need to make changes on the level of the political and the personal to ensure death benefits are properly distributed.

There is a stigma associated with discussing money in American families. If we were more willing to share financial information with our loved ones, fewer policies would go unclaimed. People are especially reluctant to discuss life insurance policies. It often seems morbid or frightening.

Weisbart says that the III recommends policyholders tell beneficiaries a policy exists as soon as it is taken out. Though it’s not necessary to tell beneficiaries the amount of the policy, it’s important they know where to look. It’s also important they know why the policy exists.

“Tell them who the company is that issued the policy, and tell them what you want them to do with the money,” Weisbart advises. “More than anything else, that will fix in the beneficiary’s mind that this is something they need to follow through on when the time comes in order to validate the wishes of the deceased…

“Once in a while we have situations where money goes unclaimed because the beneficiary gets a check and doesn’t want to cash it. Why? Because to some people, that’s kind of capitalizing on an unfortunate death. They don’t want to do that. For others, it makes it too real that that person died. That’s why the III recommends that you tell people what you want them to do with the money after you die, whether it’s ‘pay off the mortgage,’ or ‘start a college fund.’ That way it won’t be contravention to the death but rather a fulfillment of death wishes.”