Life-Insurance Companies: Bad-Faith Policies

You have to pay attention more than ever these days if you have a life-insurance policy or if you shop for one. Insurance companies use a variety of tactics to delay death-claim payments to increase their profit. And as insurers increasingly use the Internet to expand sales efforts, consumers should watch out for a web of potential problems. 

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The life-insurance industry likes to tell you that it pays 99 percent of its claims. It’s an impressive and accurate figure—and one that suggests that life-insurance companies have your best interests at heart. But life-insurance companies also disputed or delayed payments of $343 million in 2010, which is the most recent year for which statistics are available. And that’s just a sliver of the abundant evidence that suggests that insurance companies are putting their own interests first while they come up with new ways to get your premiums faster at less risk to themselves.

Faced with sharply declining sales—and profit—U.S. life-insurance companies today employ a range of strategies that delay payment of death benefits, so the companies can maximize their profit on the premiums that you pay to them, experts tell Consumers Digest. 

For instance, at press time, insurance commissioners in at least 35 states were investigating evidence that insurance companies willfully ignored information about customer deaths to postpone paying claims—sometimes for years.

At the same time, life-insurance companies are eager to speed up the amount of time that it takes to determine the risk factors for life-insurance applicants, which means that you can get a life-insurance policy a lot quicker these days. But these changes come with a cost to consumers. The use of online applications can compress the underwriting process from weeks to mere minutes but could raise your premiums and restrict your benefits. 

And life-insurance companies seem poised to track your footprint by looking at what you buy and what you post on social-network sites to determine what risks that policy applicants pose. Critics say that approach should raise privacy red flags for consumers.

Life insurers want to accelerate the sales process and hold on to your money for as long as they can, because consumers are buying far less life insurance than they used to. Individual life-insurance premiums fell by 19.2 percent between 2009 and 2010, according to industry figures that were compiled by American Council of Life Insurers (ACLI), which is an industry trade group. Insurance-company revenue that comes from the sale of individual life-insurance premiums dropped by 2.5 percent from 2000 to 2010, industry figures show.

Unfortunately, life insurers have no federal oversight, so it falls to states to look out for consumers and make sure that insurance companies have enough money to back up the claims on the policies that they sell. Limited oversight sometimes translates into a raw deal for consumers, whose best interests can be trampled by a rush to satisfy what’s best for life-insurance companies.

DIMINISHING RETURNS. At press time, we still awaited fallout from a multistate investigation into most large life-insurance companies’ neglect to use a key tool when it comes to handling death-benefit payments. The continuing investigation centers on why insurance companies don’t use a massive government database of U.S. deaths—Social Security Administration’s Death Master File—to determine who should receive unclaimed benefits. At least 30 states are conducting investigations into the practice, but that number could be higher, because many states aren’t discussing what actions they were taking at press time. 

State officials argue that the information that’s in the database, such as a customer’s Social Security number and last known address, would help insurance companies to determine whether a life-insurance policyholder has died—and that a claim should be paid out to the policyholder’s beneficiaries. What infuriates regulators and consumer advocates is that insurance companies use the same database to determine whether customers who purchased annuities from the same insurers have died. If a person who had an annuity shows up on the list, life-insurance companies promptly stop making annuity payments.

By not using the death database to determine whether a policyholder died, insurance companies can delay making payments on a life-insurance policy—sometimes for years—if surviving family members don’t know about it and don’t file a claim for payment, says Kevin McCarty, who is Florida’s insurance commissioner. In some cases, companies also continue to subtract premiums from lapsed policies until the policies’ cash value has run down to zero, at which point the policies are canceled, according to Lisbeth Landsman, who is an attorney for California’s Department of Insurance. 

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