One of the biggest problems in the life insurance industry - for both underwriters and consumers - is that in many cases, people do not know much, or anything, about benefits to which they are entitled after a policyholder passes away. This creates a regulatory mess for many insurers, and beneficiaries missing out on potentially thousands of dollars they should have received. Experts agree: The best way for policyholders, beneficiaries and insurers alike to avoid these issues is for better communication about those individuals' life insurance coverage.
Today, just 39% of baby boomers who are life insurance beneficiaries have all the information they need to obtain the money from the policy in the event of a loved one's death. Yet according to a survey from the National Association of Insurance Commissioners, they are the most prepared for such an eventuality among the three generations surveyed; just 30% of millennials and 22% of members of Generation Z, sometimes referred to as Zoomers, had as much information as was necessary to claim benefits.
Where those shortcomings arise
There are three areas beneficiaries may need to know about in order to fully claim the benefits to which they are entitled, and few have that information today, the poll showed. For instance, just 41% of boomers, 29% of millennials and 23% of zoomers even know where policy documentation is being held (such as a safe, filing cabinet and so on). Moreover, just 33% of boomer beneficiaries knew which insurer the policyholder had obtained coverage from. That, too, still compares favorably with 30% of millennials and 25% of Generation Z.
Finally, 30% of boomers, 26% of millennials, and just 18% of zoomers said they knew the value of the benefits in their name.
Understanding the options
Many of these problems simply point to a lack of communication between an insured person and the beneficiaries they name for their life insurance, and perhaps between insurers and policyholders. For that reason, more may need to be done to make sure all involved know what's going on. Every insurer has different rules for how policyholders can alter or update their lists of beneficiaries; while many can do so online, PolicyGenius notes that more require insureds to fill out a paper form and mail or fax it to their underwriters, or place a phone call.
There may also be situations in which there are tax implications for being a beneficiary of a life insurance policy that goes unclaimed for some period of time, such as potentially being required to pay tax on the interest accrued, or depending on whether the money went to the policyholder's estate before being distributed to the beneficiary. These are certainly also issues that policyholders would be wise to examine and talk to beneficiaries about sooner than later.
Unclaimed benefits are quite common
Underwriters likely know all too well the fallout that comes from people not knowing about life insurance benefits in their name. This can happen for many reasons, according to the Insurance Information Institute, but some of them are incumbent upon insurers to address. For instance, if an insured person passes away, life insurers may not receive that information until the Social Security Death Master File is updated, and that may not be immediate.
On the other side of the ledger, policyholders should always strive to directly notify their life insurers about changes of address. Likewise, those companies may have a difficult time tracking down beneficiaries if information is not kept up to date, or if the listed information is vague or incomplete (i.e. not including full name, Social Security number and so on). However, even in these cases, it may be important for insurers to communicate more effectively with their policyholders to make sure they know how important these issues are, especially at times when they are updating or changing their coverage.
What's at stake?
The kinds of disconnects outlined above may not seem like a big deal to some policyholders, but in aggregate, they add up quickly. The III notes that some $1.1 trillion in life insurance benefits have been paid out to the rightful parties over the past 20 years, but a large number of plans also slip through the cracks. Fortunately, there are now more ways than ever for consumers to find out if they have unclaimed life insurance benefits in their name, such as through state insurance department websites and industry resources. This way, people will always have options for identifying and claiming benefits to which they are entitled.
However, these issues may require insurers to change their approach with life insurance policyholders, especially as it relates to encouraging stronger communication between those people and their beneficiaries. It doesn't do anyone any good to have policies go unclaimed - most will end up held by state governments in these situations - so a better understanding of what's involved and what's at stake is a must for all sides.