Life Insurance: Post-Mortem Options And Possibilities

Life insurance is a financial safety net for your loved ones after you pass away. It's a contract between a policyholder and an insurance company that pays out a death benefit to the beneficiaries when the insured person dies. However, it's not always easy to determine if someone had life insurance, especially if they didn't inform their loved ones. So, what happens if you suspect a deceased relative had life insurance, but you can't find any proof? Here's a guide to help you navigate this complex situation and explore your options for finding out if life insurance exists and how to claim it.

Locating a lost life insurance policy

Search the Deceased's Documents and Correspondence

Go through the deceased's paper and digital files, bank safe deposit boxes, and other storage spaces for insurance-related documents. Check their mail and email for premium or dividend notices, and review their tax returns for the past two years for any records of interest income or expenses paid to life insurance companies.

Contact Relevant Parties

Speak to the deceased's banker, financial advisor, and attorney. These individuals may have knowledge of or have helped secure a life insurance policy.

Submit a Request to the NAIC Life Insurance Policy Locator Service

The National Association of Insurance Commissioners (NAIC) offers a free online tool to assist in locating life insurance policies. Once a request is submitted, NAIC will ask participating companies to search their records, and if a policy is found, the company will respond to the designated beneficiary or authorized individual.

Contact the State's Unclaimed Property Office

When a life insurance company is aware of a deceased client but cannot locate the beneficiary, they must turn the death benefit over to the state where the policy was purchased as "unclaimed property." The National Association of Unclaimed Property Administrators provides a search tool to access your state's unclaimed property database.

Be Aware of Special Challenges

There may be circumstances that complicate the search, such as the insurance company changing its name, merging with another company, or selling the policy to another company. In such cases, the NAIC provides tips on locating these companies. If the company has gone bankrupt, contact the state life and health guaranty association through the National Organization of Life & Health Insurance Guaranty Associations' search tool.

Consider Fee-Based Services

If all else fails, fee-based services are available to assist in locating a lost insurance policy. MIB, an insurance membership corporation, offers services to find evidence of life insurance applications, although it does not indicate if a policy was purchased. Several private companies also provide similar search services for a fee.

How to file a claim

The death of a loved one is a traumatic experience, and the last thing you want is to be overwhelmed by administrative tasks. Here is a step-by-step guide to help you file a life insurance claim efficiently:

Obtain a Copy of the Death Certificate:

The death certificate is a crucial document for filing a life insurance claim. Contact the vital records department or its equivalent in the state where the death occurred. You may be able to request this certificate online, or the funeral director or cremation service may be able to assist you. Keep in mind that only immediate family members, such as a spouse, children, or siblings, are usually authorised to obtain a death certificate. It is recommended to order multiple certified copies, as you will need one for each life insurance claim and other estate-related tasks.

Locate the Life Insurance Policy:

The next step is to identify the life insurance policies held by the deceased and the corresponding insurer(s). Check the deceased's personal papers, digital records, and contact their lawyer or financial advisor if necessary. If you are aware of any other insurance policies they had, such as home or auto insurance, contact those brokers or issuers to inquire about the life insurance policy. If all else fails, utilise the National Association of Insurance Commissioners' (NAIC) life insurance policy locator tool, which searches nationwide insurance records.

File the Claim with the Life Insurance Company:

Once you have gathered the necessary information, submit the claim to the life insurance company. This can often be done online, but some companies may require a phone call or a paper form. You will need to provide the insured's policy number, date of birth, full name, date of death, place of death, and cause of death. Each beneficiary named on the policy will need to file their own claim. There is no time limit for filing a claim, but it is advisable to do so promptly to expedite the process.

Choose the Form of Payout:

When submitting the claim, you will have the option to choose how you would like to receive the payout. The two most common options are a lump-sum payment, where you receive the entire death benefit at once, or an annuity, where you receive smaller payments over a specific period or for life. With the annuity option, you may owe taxes on the portion of the payment that earns interest.

Overcoming Challenges and Claim Denials:

In some cases, you may encounter challenges or claim denials. Common issues include a lapsed policy due to non-payment, a policy within the contestability period (usually the first two years), a change of beneficiary, an expired term life policy, or other legal hurdles. If your claim is denied, you can request the reason for the denial in writing and consider consulting a lawyer to discuss your options.

It is important to be responsive and provide accurate information to the insurance company to facilitate a smooth and timely claim process. By following these steps, you can ensure that you receive the benefits you are entitled to and protect yourself from unnecessary delays or complications.

Choosing a payout option

Lump-Sum Payment

The most common and traditional payout option is a lump-sum payment, where the beneficiary receives the entire death benefit at once. This option offers the most flexibility, as you have full control over the money and can use it as you see fit. However, receiving a large sum of money can be overwhelming, and you are responsible for making it last. Additionally, if you choose to put the money in a bank account, you may need to spread it across multiple accounts due to deposit insurance limits.

Retained Asset Account

With this option, you can leave the payout with the insurance company in an interest-bearing account. The insurance company will provide you with a checkbook to access the funds, and you can earn interest on the account. This option eliminates the need to worry about deposit insurance limits, as the insurance company will protect the entire amount. However, the interest rate offered by the insurer may not be as competitive as what you could get with a high-yield savings account or other investments. Additionally, any interest earned on the account will be subject to taxation.

Annuity or Installment Option

You may have the choice to convert the insurance payout into an annuity, which provides guaranteed payments for life. The amount of each payment is based on your age at the time of the claim and the value of the death benefit. This option can provide peace of mind and ensure that you don't spend a large lump sum too quickly. However, the payments will be smaller if you are younger, as they need to be distributed over a longer period. There may also be fees and surrender charges associated with this option, and if you die before collecting the full benefit, the remaining money goes back to the insurance company.

Life Income with Period Certain

This option guarantees that payments will continue to be made for a specified period, even if the beneficiary dies before the end of that period. For example, if you choose a 10-year period and pass away in year three, your designated beneficiaries will continue to receive payments for the remaining seven years. While this option provides some security, the payments will be lower than a traditional life income option.

Specific Income Payout

This option allows you to receive the life insurance payout in installments of your choosing. For instance, you could opt to receive a certain amount annually over a set number of years. This provides more flexibility than a traditional life income option but less than a lump-sum payout. Any interest earned on the installments will be subject to taxation.

When deciding on a payout option, it is essential to consider your financial needs, goals, and comfort level with managing a large sum of money. Seeking guidance from a financial planner or estate planning attorney can help you make an informed decision that aligns with your specific circumstances.

What to do if there are multiple beneficiaries

If there are multiple beneficiaries, the policyholder can specify any number of "co-beneficiaries" and how they want the proceeds of the policy to be distributed among them. The policyholder can choose to divide the payout equally among the beneficiaries or decide on a percentage for each beneficiary to receive. For example, they may want to allocate 50% of the payout to their spouse and split the remaining 50% among their children.

It is also possible to name multiple primary and contingent beneficiaries. Primary beneficiaries are first in line to receive the death benefit. Contingent beneficiaries will receive the benefit if the primary beneficiary is deceased, unreachable, or declines to accept the payout. If there are multiple primary beneficiaries, the contingent beneficiary will likely only receive the death benefit if none of the primary beneficiaries are reachable.

It is important to note that the beneficiary designations need to be updated manually to reflect any changes in the policyholder's life. For example, after a divorce, the policyholder may want to remove their former spouse as a beneficiary.

In some cases, beneficiary designations are irrevocable, meaning they cannot be changed without the beneficiary's consent. This type of designation is often chosen to protect dependent children or in cases involving alimony or child support agreements.

Understanding the contestability period

The contestability period in life insurance, typically lasting two years, allows the insurer to investigate and deny claims due to misrepresentation or fraud. This period is crucial for policyholders to understand to ensure their claims are honoured and their beneficiaries are protected.

The contestability period is a specific timeframe, usually two years, after a life insurance policy goes into effect. During this time, the insurance company has the right to investigate the accuracy and truthfulness of the information provided on the insurance application.

The contestability period exists primarily for two key reasons:

• To protect insurers from fraud: Life insurance involves a significant financial risk for the insurer. The contestability period allows them to investigate potential fraud or intentional misrepresentation on the application, ensuring they do not pay benefits based on false information and preventing financial losses.
• To ensure fair premiums: Life insurance premiums are calculated based on the policyholder's risk profile, including age, health history, and lifestyle. If a policyholder misrepresents or omits information on their application, they could pay a lower premium than they should. The contestability period allows insurers to verify the information and adjust premiums if necessary, ensuring fairness for all policyholders.

During the contestability period, the insurer can review and investigate claims to ensure the information provided during the application process is accurate and truthful. If the policyholder passes away during this time and a claim is made, the insurer has the right to investigate the claim thoroughly, including reviewing medical records, autopsy reports, and other relevant documents. If the investigation confirms the accuracy of the application, the insurer will approve the claim and pay the death benefit to the beneficiaries. However, if discrepancies or false information are discovered, the insurer may deny the claim or adjust the benefits.

Reasons for Denial of Coverage During the Contestability Period

During the contestability period, a life insurance company can deny coverage for several reasons, mainly related to misrepresentations or fraud on the insurance application:

• Material Misrepresentation: Intentionally or unintentionally providing false information that would have significantly affected the insurer's decision to issue the policy or determine the premium amount. Examples include failing to disclose a pre-existing medical condition or lying about smoking habits.
• Fraud: Intentionally providing false information or engaging in deceitful practices, such as identity theft, insurance fraud schemes, or concealing criminal activity.
• Non-Payment of Premiums: If the policyholder fails to pay premiums during the contestability period, the policy may lapse, and the insurer could deny a claim.

It is important to note that the burden of proof lies with the insurer to demonstrate that a material misrepresentation or fraud occurred, and beneficiaries have the right to challenge a denial of a claim.

After the contestability period ends, the life insurance policy becomes incontestable, providing added security for both the policyholder and the beneficiaries. The insurer can no longer deny or contest a claim based on the original application unless there was fraud or non-payment of premiums. The policy becomes a more reliable financial asset, and the death benefit is secured, providing financial relief and stability for the beneficiaries.

Frequently asked questions