Taryn Phaneuf Jul. 22, 2016, 2:41pm


SPRINGFIELD — In a legislative session noted as one of inaction until the brink of a new fiscal year, one bill Illinois lawmakers did manage to pass was a measure that requires life insurance companies to make an effort to track down beneficiaries of unclaimed policies, contracts and accounts when they know the policyholder has died.

The bill called the Unclaimed Life Insurance Benefits Act, passed both houses and was sent to Gov. Bruce Rauner on June 27 where it remains unsigned. 

The law would require insurance companies to make “good faith efforts” to locate beneficiaries of unclaimed life insurance policies, annuity contracts, and retained asset accounts. It would require companies to start comparing their records to the U.S. Social Security Administration's Death Master File (DMF) — an updated database of death certificates that would show whether the policyholder has died. If the company can’t find the beneficiary, the law would require it to give up the proceeds as unclaimed property, which are handled by the Illinois State Treasurer.

Stakeholders lobbied both sides of the issue, which has been raised in several states over the last few years. Many in the industry are open to the changes — which garnered unanimous support from lawmakers — but it constitutes a major shift in how these insurance policies are handled, a Kemper Corp. spokesperson told the Record.

“Keep in mind that virtually all insurance products have always been marketed and regulated with the understanding that the customer would come forward to initiate the claim process,” the spokesperson said. “Now, the life insurance industry is being told that it’s incumbent on the companies to go out and find out if a claim might be payable. That’s a massive change to absorb.”

While calling for the governor to sign the bill, Illinois Treasurer Michael Frerich and other proponents pointed to companies who use the Death Master File to stop annuity payments but not to determine if life insurance benefits are owed.

“It’s a disappointing fact, but some life insurance companies admit that they avoid paying death benefits to increase their profit margins,” Frerichs said in a statement asking Rauner to sign the bill. “Governor Rauner has an opportunity to sign into law a measure to ensure Illinois residents are not victimized by certain life insurance companies.”

But there’s also more under the surface of the issue — and there may be more in it for the state of Illinois than Frerichs says.

In 2015, three Kemper Corp. insurance companies sued Frerichs and private auditing company Verus Financial, claiming they were requiring insurers to pay policy benefits to beneficiaries or to the state if the policyholder appeared on the DMF, rather than paying benefits when they are due under policy contracts.

According to the suit, Frerichs’ authorized unclaimed property examinations of about 40 insurers that issue life insurance policies in the state, and in many of these audits he hired Verus to do the audit. Verus gets paid for results, either as a percentage or a flat fee.

Litigation is ongoing in California and Illinois.

The law that passed in Illinois holds that if an insurer can’t locate a beneficiary, the benefits get handed over to the treasurer as unclaimed property. There are steps in place to continue the effort to reunite people with the money their loved one intended them to have. But, after a while, if it isn’t collected, the state can keep it.

Kemper Corp. is critical of states’ efforts to pass this law because of potential conflicts of interest.

“These states may claim they are just protecting consumers, but their actions expose that they are more interested in getting their hands on monies and properties that citizens may not be monitoring. States generally do a poor job of returning assets to the rightful owner,” the Kemper spokesperson said. “Additionally, state officials have not disclosed that the other big winners in this area are the audit firms that take a huge piece of the assets they claim to have ‘found.’”

The lawsuit with Verus revealed that the audit firm has earned more than $51 million from its work in California and Illinois, the spokesperson said. “States and these auditing firms have a questionable relationship that needs further examination, as does the state treasurers’ conflict of interest.”

Verus was unavailable to answer questions for this article, but public records show it hired a handful of lobbyists during this year’s legislative session.

Kemper, which also lobbied state lawmakers, calls the bill a “one-size-fits-all approach” that doesn’t suit companies that haven’t acted inappropriately with consumers.

“Given the state treasurer’s rhetoric on the topic, we believe lawmakers supported the Illinois bill because they were not fully informed on all the facts,” the spokesperson said. “When they only heard about the 24 companies that behaved inappropriately and settled — out of the hundreds of life insurers that serve consumers honorably — they approved the one-size-fits-all bill.”

Legislatures across the country are considering enacting laws that fall under a new national standard supported by the insurance industry. The American Council of Life Insurers has advocated strongly for the standard.

So far, 21 states have enacted legislation, John Gerni, Regional Vice President of State Relations at the American Council of Life Insurers, told the Record. He said the Illinois bill includes provisions ACLI strongly supports, but it isn’t based on the national standard drafted by the National Conference of Insurance Legislators.

The insurance industry is starting to recognize ways that life insurance differs from other kinds of insurance, Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute, told the Record. If a person gets into a collision with a car, he or she informs the insurance agency. It’s meant to work the same with life insurance — the insurer waits for a beneficiary to file a claim.

But people live longer now. They could forget they purchased a plan decades ago; the company could have merged with another or changed its name. Either way the timeframe makes it more likely that the beneficiaries don’t know the plan exists or where to file a claim.

“There’s widespread agreement that companies should check with records of death,” Weisbart said.

Some states want this new rule to affect past policies, as well. Industry opinions differ over whether that’s fair, Weisbart said. 

This is one of Kemper’s issues with the Illinois law.

“We suggested that with respect to companies that were already using the DMF on part of their business, mainly annuities, that such companies should have to use the DMF on all of their policies,” the spokesperson said. “For companies like us, however, that had not used the DMF, we felt a reasonable solution was to require DMF use on all policies sold going forward.”

The spokesperson said Kemper hopes Rauner either vetoes the bill and pushes the legislature to revisit the issue or uses his amendatory veto powers to “fix the flaws in the current bill.”

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