What happens to old lost life insurance policies?

A relative has just died. He had a life insurance policy with you listed as the beneficiary. There's just one problem: You can't find it. You have no idea which insurance company wrote it, or how much it was for.

But what if you find it in the future? Will you still be eligible to receive the death benefit?

Hope they paid their insurance bills

If you're a beneficiary and you find a life insurance policy shortly after the insured dies (within six months to a year, for example), claiming the death benefit should be trouble-free.

First, determine if the insured had term or permanent life insurance. (Not sure what that means? Read our Life insurance basics.) If they held a term policy, you'll receive the death benefit if they died before the end of the policy term. If they died after the policy expiration date, you would get nothing.

If the insured had a permanent life policy, you'll receive the money if the death occurred while the policy was "in force," meaning that all premium payments were made up until the time of death. If the death was a while ago, you'll receive the benefit with interest from the date of death.

However, if the policy lapsed — meaning the insured stopped making premium payments before they died — there's a chance you may get nothing. When a permanent life insurance policy lapses, most insurance companies switch its status from permanent insurance to one of two options: "extended term," which buys a short-term life insurance policy using the cash value of the policy; or "reduced paid up," which means the life insurance will exist until you die, but the value of the death benefit is greatly reduced.

Gerry Brogla, an actuary for State Farm Life Insurance Co., says that in the majority of the cases at his company, the permanent policy continues as extended term if it lapses. At State Farm, extended term is the default option for most permanent policies.  

If the policy lapses, and the extended-term period expires before the insured dies, the policy is worthless and the beneficiary will get nothing. But if the insured dies before the extended-term period is up, the beneficiary will receive the death benefit. If the policy lapsed because the insured died (thus ending premium payments), the beneficiary will still collect the full death benefit, regardless of when the extended term was up. The beneficiary always needs to supply the insurance company with a death certificate to verify the date of death.

There is no time limit during which a beneficiary must step forward to collect the money, according to Jack Dolan, spokesperson for the American Council of Life Insurers. "If a person shows up 30 years after [the insured's] death, the company still makes good on it," Dolan assures.

What happens if no one ever reports the death?

If the insured dies, and thus premium payments stop, and the insurance company does not know of the death, the policy lapses, even though the insurer doesn't know why the payments stopped.

When an insurance company stops getting payments, it sends letters to the insured informing them that the policy may lapse as a result of unpaid premium. If the letters go unanswered, the company may initiate a search to find the insured. If that comes up empty, the company will then lapse the policy.

If a beneficiary to a policy never steps forward, it unfortunately means that the insured paid money to a policy throughout their life and their beneficiaries never see a penny.  

If you're lucky, the state may have your money

Let's add a wrinkle to the rules. Say the insured dies and three to five years later you, the beneficiary, still can't find the policy. There's a chance — though a slight one — that you can go to the state, rather than the company, to get the money.

If a company knows that an insured died and it cannot find the beneficiary, it must turn the full death benefit over to the state comptroller's department within three to five years of the insured's death. The money is transferred to the state where the insured bought the policy. The money is considered "unclaimed property" and gets lumped in with dormant bank accounts and uncollected rent deposits. The comptroller's department maintains a database that lists the names and addresses of lost beneficiaries.

Although states receive these death benefits, they don't necessarily keep them in a reserve fund. For example, in Texas, the money is transferred into a general fund used for to pay for state services. State lawmakers then allocate money to the Unclaimed Property Division to pay claims if beneficiaries ever step forward. Not all claims are covered in the account, but the amount allocated is based on "past experience" in paying claims, not the actual value of the claims, says Sheila Clancy, a spokesperson for the Texas comptroller's department. That's because not all property is claimed.

In Florida, most of the unclaimed life insurance money goes to the state's Department of Education. Peter Devries, an administrator for unclaimed property in Florida's Banking and Finance Department, says his department keeps only about 5 to 8 percent of what comes in to pay claims. If that money runs out, he borrows money back from the education department to pay claims.

Many states will try to contact beneficiaries in an effort to pay the death benefits. In Texas, for example, the names and addresses of the beneficiaries are published annually in each county in the state. The New York State Comptroller's office has a Web site where you can enter the insured's name and city where they lived and look up any death benefit that's owed to you.

Keep in mind that your chance of finding the policy with the state are slim. The insurance company has no obligation to hand the money over to the state if they are unaware the insured died. In most cases, it's the beneficiary who contacts the insurance company.

Also, the insurer only transfers the money to the state three to five years after it cannot find the beneficiary but knows the insured died. If the state doesn't have the death benefit, it could be because the insurer is still looking for the beneficiary or doesn't know the policyholder is deceased.

Many insurance companies insist they do not measure how many life insurance policies go unclaimed, simply because it's impossible to gauge. Companies have no way of knowing that a lapsed policy belongs to a dead person.

And, handing death benefits over to the state is extremely rare. Dave Potter, a spokesperson for Hartford Life, says less than 1 percent of their death benefits go unclaimed.

Del Chance, a life insurance claims manager at State Farm, says "Turning over life policy benefits to an individual state after the death of an insured is extremely rare and we have not had any of these within the past several years. State Farm utilizes their own search techniques as well as outside vendors to locate lost beneficiaries in the event of the death of one of our insureds. By and large these procedures have always located the beneficiary."  

Last updated Nov. 29, 2001

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