If you have life insurance... do you trust it?

I recently saw a disturbing 60-Minutes segment called “Not Paid”.  Disturbing to me was the lesson that life insurance companies who collect millions of dollars in premiums for death benefits Do Not Pay when a policy holder dies UNLESS the beneficiary specifically contacts the insurance company and makes a claim.

WHAT??? Are you kidding??? Huh. Is this an ethical dilemma or what?

Apparently this is not a joke, as this is quite common that beneficiaries do not know there is a policy.  The attitude of insurance companies is that these policies are contracts and the beneficiary has to follow the terms of the contract. In other words, they have to read the fine print and make a claim to get their money.

According to the Florida CFO in charge of regulating the insurance industry, non-payment is part of the insurance companies’ plan and the money collected from policy holders is in their own investment accounts earning interest. Insurance companies they investigated actually knew their policy holders died by checking out something called a “master death file” issued by the federal government. The examples in the segment showed companies had proof in their own files that policy holders died, but they canceled the policies for non-payment and kept the premiums for themselves.

On top of this, if there is an annuity with the same life insurance company, some companies were reported in this segment to continue drawing premium payments from the cash value of the annuity until there was nothing left, even when they knew the policy holder died. The Florida Insurance Commissioner calls this “stealing”.  I agree with him and add to it “unethical”.

The insurance companies are saying it is “not fair” to make them go back in time to find and pay beneficiaries.  They didn’t plan for this and would have to “substantially alter their business practices” to do this.  What?  What exactly is the right thing to do here? I guess it depends on which side of the fence you’re sitting on. Or so the insurance companies would like us to believe.

25 companies have been sued and have agreed to make restitution – to the tune of $7.5B in back death benefits.  However, 35 more, with up to $3B more in unpaid benefits, have not yet settled and some are fighting these investigations.  After the initial broadcast of this segment 11 of the 35 companies either agreed to make payments or entered into settlement negotiations for an additional $1B in payouts.

I am not a fan of insurance and I have absolutely no sympathy for the companies who are being sued or “forced” to change their business practices.  I, like many people, have insurance policies as a necessary precaution. In my recent experience, I’ve lost trust in insurance companies who made great promises and failed to cover losses due to some loophole. This latest report of unethical behavior by insurance companies merely proves my distrust and skepticism is warranted.

If you have any life insurance policies, all I can say is watch this segment.  And put copies of your life insurance policies into the same file as your will.  That way your beneficiaries will know you have a policy and they can make the appropriate claims.  It might also be a good idea to put a few dollars a week under your mattress to save for emergencies.  It might be the only way you can afford to replace the roof, pay the hospital bill, or cover other losses…!