People buy life insurance policies for a number of reasons. Sometimes, they want to ensure their funeral expenses are taken care of; sometimes they want to leave a beloved nephew -- that nephew who moved away from Florida after college -- a tidy sum of money that won't be subject to probate. Sometimes they want to make sure a favorite charity receives a legacy. Really, there are lots of reasons.

It's safe to say, though, that no one buys a life insurance policy to add a little something to the insurance company's balance sheet. And yet, insurance insiders estimate that companies nationwide are holding on to about $1 billion that does not belong to them.

A group of state regulators, lead by the Florida Office of Insurance Regulation, recently invited major life insurers to discuss how the companies track policyholders' deaths and find the named beneficiaries.

An insurance policy is profitable if it earns more in premiums that it pays out in benefits. An annuity works a little differently. The owner, or annuitant, pays the company for the annuity, which then pays out until the owner dies -- the company benefits, then, by stopping those payments as soon as possible.

That is one of a myriad of reasons insurance companies are highly regulated and subject to the terms of their policies, their contracts with their policyholders.

How, then, can companies justify not doing their darnedest to find out if a life insurance policy should be paid out to the beneficiary?

We'll try to explain in our next post.

Source: Bloomberg, "Insurers may owe more than $1 billion in unpaid policy benefits," Alexis Leondis, 05/19/2011