The award-winning CBS News television program, 60 Minutes, aired a disturbing story this week that should be cause for concern for all Americans who own life insurance policies. The story, reported by CBS News Correspondent Lesley Stahl, shone a national spotlight on calculated efforts by life insurance companies in several states to avoid paying life insurance claims.
The strategy is made possible by the fact that many people purchase life insurance policies when they are young adults and toss the policies in desk drawers, while continuing to pay the premiums year after year. Often times, the beneficiaries of the policies are unaware they even exist, with the insured individuals relying on the companies who sold the policies to make good on paying out the death benefits to their beneficiaries when they pass away.
Insurance regulators in states such as Florida, Oklahoma and West Virginia and other states have launched investigations into this shameful practice by insurers and are pursuing consumer protections that would require insurance companies to be more responsive about paying out death benefits on policies. To date, 25 of the nation's biggest life insurance companies have agreed to pay more than $7.5 billion in back death benefits. However, Stahl reported that about 35 insurance companies have not settled and remain under investigation for not paying when the beneficiary is unaware there was a policy.
There are two primary ways that life insurance companies have failed to carry out their responsibilities in claims payouts, according to the state regulators interviewed by 60 Minutes. For one thing, many life insurers don’t bother to monitor for the deaths of individuals who have purchased policies from their companies, even though virtually all of them have access to regular death reports published by the Social Security Administration. Second, and even more disturbing, regulators in Florida discovered in recent audits that many life insurers held off on paying out death benefits on policies even when they were fully aware that the person who took out the policy had passed away. Armed with these shocking findings, Florida recently imposed new legal requirements for life insurance companies to search death files and promptly issue payments to beneficiaries of policies that mature.
This strategy of trying to avoid paying claims on life insurance policies is tragic for the families that are denied access to the benefits they deserve, but it is not the only way that many insurers achieve greater profits at the expense of loyal policy holders. Many insurance companies also work hard to see to it that consumers are unaware of all available options if they decide they no longer want or can afford to keep their life insurance policies. As a result, tens of thousands of American seniors simply lapse or surrender their policies each year, rather than pursue one of the other options available to them that are often of far greater financial value.
For example, a life settlement transaction can bring four to eight times more money to the policy holder than what they would have been paid by the insurance company if they were to surrender the policy. As with the practice of avoiding the payout of death benefits it at all possible, the insurance industry has successfully kept this information about life settlements from achieving widespread awareness in the public. A survey prepared for the Insurance Studies Institute reported that more than half of seniors over the age of 65 are not familiar with the option to consider selling their life policy; further, 90 percent of seniors who have lapsed a policy would have considered selling it if they had known a life settlement was an option.
As more American seniors learn about a life settlement as a rewarding option for a life insurance policy they no longer need or can afford, they conclude that it’s an attractive alternative to lapsing or surrendering the policy back to the insurance company. The life insurance industry has proven its reluctance to openly share information with consumers about all of their rights and options, but history tells us that information wants to be free.