Are You Worth More Dead Than Alive?

NEW YORK (MainStreet) — Not long ago I took out my first life insurance policy. It was a morbid afternoon, not least because, from an actuarial standpoint, I am now worth considerably more dead than I am alive. However, it had to be done.

Life insurance is a rite of passage. It's growing up, admitting that people depend on you as an adult and that their world might go on without you. In my case, I'm getting married next year and need to make sure that my wife-to-be is provided for even if our next door neighbor's air conditioner comes loose from its window the next time I go to get a cup of coffee.

Pardon me while I knock on wood.

As I said, sooner or later it has to be done. We all grow up, and part of that means protecting the people who need you.

The thing is, sooner or later the reasons we need life insurance in the first place also tend to run out. After a certain point it gets steadily more useless as you grow older. Our children grow up, spouses make money and people just don't depend on you as much any more. Suddenly you're stuck with premiums for a payout that nobody needs, but that you've spent too much money on to just walk away from.

Fortunately, there's a solution. It's called life settlement, and it's a way to finally get something for that policy you bought decades ago.

A life settlement is simply a buyout for existing life insurance policies. Like an old Chevrolet, you sell the policy to a settlement company and they pay a lump sum in return. The company assumes the premiums, and eventually collects the benefits upon your death. They pay based on the policy size, as well as, how much longer the settlement company expects you to live.

It's nobody's idea of a fun conversation, but in the end, you get to profit off a rapidly depreciating asset. It's also the solution to a real and growing problem in the life insurance industry: unpaid benefits.

"On average about 80% of all life insurance policies never see a claim," said Scott Page, CEO of the life insurance settlement company The Lifeline Program. "[And] there's been a few stories that have hit the media about insurance companies' deceptive practices... insurance companies like to deny, delay confuse and refuse claims. They're in the business of taking premiums and not paying out any settlement."

Unpaid and unclaimed life insurance policies are, according to Page, a huge problem within the industry. If a beneficiary doesn't specifically know to collect after someone's death, and which insurance company to contact, that policy can lay dormant. The insurance companies make no effort to reach out and inform beneficiaries when benefits are due.

"The insurance industry has tools that can track an individual's health," Page said, including the Social Security Master Death Index which tracks deaths across the country. "The industry uses this tool to track when to stop making annuity payments, but where it fails to use this tool is to let insurance beneficiaries know when they're entitled to claims."

This is a particularly unfortunate, if common, practice given that many states require life insurance companies to follow this exact procedure.

How many of us know if we are a beneficiary under someone else's life insurance policy? If you do, who is their insurance company? Worse, what if the insured is estranged or too young to even know what questions to ask?

You see the issue. If you don't know whom to call, and the doesn't bother, that money is going to stay right where it is.

It's a substantial problem. According to a report in The Chronicle, New York insurance regulators this summer recovered more than $1.1 billion in unclaimed life insurance benefits from companies which had simply decided to sit on the money. Elsewhere, regulators are seeking an estimated $3 billion in unclaimed funds from companies which, again, chose to simply see no evil and hear no evil.

"You shouldn't have to have a lawmaker tell you to do the right thing," Page said about the nationwide collection efforts. "The insurance industry, even though they spend millions and millions of dollars on slick advertising talking about how they care about you and we're there for you, it's all bull. They're all there for the bottom line."

Although the exact numbers are difficult to peg down, according to a 2011 report in the New York Times, "hundreds of millions of dollars" in benefits go unclaimed every year.

Life settlement is certainly a way to prevent that, although decent paperwork and notifying your loved ones works pretty well too. For people who don't need that policy anymore though, there's a lot to be said for cashing it in and getting their money back now.

Still, it's a surprisingly little known option. In a recent survey by the Lifeline Program, more than four out of five senior citizens had no idea that they could sell an insurance policy. In fact, more than half of them had allowed their life insurance to lapse, seeing it as a liability and ultimately collecting nothing for the years of premiums paid in.

For people beginning their adult life, the unfortunate reality is that it's time for us to begin taking out these policies that will protect our loved ones. For people whose loved ones can now protect themselves, however, this may be a great way to pay for that European vacation.

I recommend Greece.

--Written for MainStreet by Eric Reed, a freelance journalist who writes frequently on the subjects of career and travel. You can read more of his work at his website www.wanderinglawyer.com.

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