Magazine article The CPA Journal

Lost Life Insurance and Annuities: Accounting for Missing Assets for Probate and Estates

Magazine article The CPA Journal

Lost Life Insurance and Annuities: Accounting for Missing Assets for Probate and Estates

Article excerpt

Identifying undisclosed assets and unknown accounts for probate administration can be a challenging task under the best of circumstances. Decedents often leave behind a confusing trail of financial information, creating unforeseen demands and distractions for their legal representatives and accounting professionals. Difficulties with record acquisition, review, and resolution, as well as risks of errors and omissions, inevitably increase when the individual is not present to produce documents or explain actions. Nevertheless, many executors, trustees, and CPAs do not anticipate the problems that arise when major institutions, rather than individuals, are the weak points in the probate process. Decades of compliance failures in the life insurance industry have resulted in billions of dollars in unpaid benefits, unreported assets, and uninformed beneficiaries. A series of major settlements-most recently with MetLife in New York-serve as cautionary examples for accounting professionals seeking information on assets and accounts for probate purposes.

Mistakes at MetLife and Other Major Insurers

MetLife, one of the largest providers of life insurance and annuities, recently acknowledged that for the past two decades it has failed to take reasonable efforts to confirm the death of insured parties and notify policy beneficiaries. The insurer entered into a consent order with the New York State Department of Financial Services in January 2019 wherein it agreed to pay restitution of more than $189 million in retroactive benefits, plus a fine of nearly $20 million ("DFS Superintendent Vullo Announces That MetLife Will Pay a $19.75 Million Fine and Provide $189 Million in Restitution to Policyholders for Failures related to Pension Benefit Transfers," press release, Jan. 28, 2019, https://on.ny.gov/35vJBde). MetLife was cited for violations dating back to 1992, including improper release of reserves for 13,712 group annuity certificates.

This regulatory action is only the latest proof of underreporting and nonpayment of estate and beneficiary interests resulting from systemic compliance failures in the life insurance industry. A series of investigations and unclaimed property audits begun in 2009 by a multistate task force tallied $7.5 billion in unclaimed policy benefits at 25 of the nation's largest life insurance companies, leading to many major settlements with wellknown insurers such as John Hancock, Prudential, and Transamerica. Some of the audited companies had evidence in their files that policyholders had died, but neglected to inform beneficiaries of the existence of the policies or pay the claims, according to Kevin McCarty, the former Florida insurance commissioner who led the task force and described its findings in an interview with 60 Minutes in 2016 (Lesley Stahl, "Life Insurance Industry Under Investigation," Apr. 16, 2016, https://cbsn.ws/2PoLjHN).

The task force reportedly found examples of active policies with paid premiums being terminated after an insurer received notification of the policyholder's death. In reported cases where decedents held both a life policy and an annuity, payments to deceased policyholders under the annuity contract were immediately terminated, but the life policies were allowed to lapse without any notification to beneficiaries. Moreover, the cash values of permanent and whole life insurance policies-which have a savings component in addition to death benefits-were allegedly drained to pay more premiums, despite a record of death in the insurer's files; the policies were posthumously canceled once their cash balances were depleted.

The most serious lapses were found in a small percentage of policies. Most life policies in the U.S. market are paid on time, totaling around $77 billion annually, according to the American Council of Life Insurers ("Benefits Paid," ACLI website, http://bit.ly/36EwOW4). Standard contracts for life insurance policies stipulate that it is the responsibility of beneficiaries to provide notification of the death and file a claim. …

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