Suppose you were told long ago that you were the beneficiary of a relative's life insurance policy or more commonly, you are the beneficiary of a parent's policy. The insured dies but you cannot find the policy. Let's suppose further that you do not know what insurance company wrote the policy. What happens until you find it and you collect as beneficiary? Or what if you never knew you were the beneficiary?
In the case where you know of the policy,to collect, you will need to notify the insurance company and deliver the policy owner's death certificate to them. What happens to the policy in the mean time?
If the insured dies and the insurance company is not notified, it will take steps to find out why a policyholder stopped making payments. However, there is a problem if the policy was paid up and no premium payments were being made. In the case of expected payments and non-receipt, the insurer will send out letters to the insured informing him that the policy may lapse as a result of unpaid premiums. If the company gets no response, they will lapse the policy.
So, without notification the type of policy determines what lapsing implies:
Term Life policy – You will be able to collect if you can prove that the owner died before the end of the term, and that he had paid all his premiums. If he died after that term expired, then there is nothing to collect.
Permanent Life policy – You will receive the money (with interest since date of death) if the death occurred while all premium payments were made up until the time of death.
However, if the insured stopped making premium payments before he died and therefore 'lapsed' the policy, then there is a chance that you might not receive anything, if too much time passes until notified. That is because when a permanent life insurance policy lapses, most insurance companies switch its status from permanent insurance to either of these two options:
- Extended term: where the company uses the cash value of the policy to buy a term life insurance policy for the same death benefit, using the cash value of the policy. The death benefit will continue for the longest period the cash value will purchase. Then there is no benefit beyond this term -0 in other words, the policy runs out.
- Reduced paid up: where the company will keep the policy in force permanently, but because there are no premiums coming to sustain the p;olicy, it will reduce the death benefit.
An insurance policy owner should not only maintain a good record of his policy and where it is located, but should give beneficiaries information too ... including the name and address of the insurance company that wrote the policy. Tracking down an 'unknown' insurance policy can be difficult if not impossible.
If the insurance company is not notified of the death, they have no responsibility to consult death records to see if they have policyholders who died. So the burden to collect is always on the beneficiary as the insurer does not need to come looking for you. Eventually, the polcyholder would reach age 100 (if the insurance company thinks he is still alive) and the policy would pay off (in most cases). The insurance company at that point would make a more active attempt to contact the policyowner or beneficiaries.
However, there are billions of unclaimed death benefits.
Interesting article. I guess I had never given the issue much thought. It goes to show how important it is to have a plan in place at an early age. I couldn't imagine if something happened to me and my wife and daughters were left penniless because they couldn't find my policy.