At a recent meeting sponsored by the Florida Office of Insurance Regulation, regulators from 15 states asked life insurance company representatives to explain -- and perhaps to justify -- a particular business practice. The problem is that insurance companies have about $1 billion in funds that should be paid to beneficiaries, governments or policyholders.

According to regulators, companies put more effort into tracking the deaths of annuity account holders than into determining if insureds of life policies have died. Specifically, the industry regularly checks the Social Security Administration's death list for names of annuitants. And what's up with that?

It's not hard to figure out the economics of the choice. If an annuitant has died, the company is paying money it doesn't owe; the company will also have to spend time and resources on reclaiming funds improperly disbursed. If a life insurance policyholder dies and no one claims the benefit, the insurer can hold onto the funds, earning interest, for as long as the law will allow.

The insurers at the meeting told the government officials that they do, in fact, consult the SSA death list for insurance policies, though, admittedly, less frequently than they do for annuities. One company said it had recently introduced the practice of an annual "sweep" of accounts with unclaimed benefits, comparing them to the list.

Insurance regulators appear not to think this is a rigorous enough approach. Without stricter government oversight of the practice, though, it's hard to guess if anything will change.

The message to policyholders is to keep complete and accurate records of life insurance policies, including policy numbers and beneficiaries. That nephew we mentioned in our last post will need the money to pay off his student loans.

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