$1 billion in life insurance unclaimed?

This post comes from Ed Leefeldt at partner site Insure.com.

Calling it a "conservative" estimate, Florida Insurance Commissioner Kevin McCarty says 40 of the largest U.S. life insurance companies may owe policy beneficiaries more than $1 billion.

McCarty made the claim after completing the first stage of an evidentiary hearing today on how life insurers were using the Death Master File, a Social Security Administration list of those who have died.

The nation's largest life insurer, MetLife, was grilled by McCarty, who heard testimony that MetLife has been using the Death Master File since the late 1980s to determine when to halt annuity payments to its clients but did not use the list until 2007 to determine whether an insured had died so his or her beneficiaries could be paid.

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And the company only began using it in a systematic and comprehensive way toward the end of 2010, according to MetLife representatives who were subpoenaed and testified under oath at today's hearing.

Nationwide Financial senior vice president of life operations Peter Golato testified that his company had run a check of its life insurance policies through the same process it uses for annuities.

''As a result of that scan, we found that approximately 1,000 policies or less than one-tenth of 1% of our book of business matched positive, where the policyholder may have passed away and benefits may be due. While only a tiny fraction of our life business, we have already found more than 70% of these policies' beneficiaries and are in the process of assisting the beneficiaries in making a claim so we can deliver all benefits including interest," he said. 

35 insurance investigations

Asked after the meeting the total amount all insurers likely owed, McCarty said it was difficult to determine, but estimated "somewhere north of $1 billion."

At least 35 states have begun investigations into whether life insurance companies have failed to find beneficiaries for life policies and how much has either been kept by insurers or "escheated" -- that is, turned over to the states to try to find the rightful owner -- instead of paid to the beneficiaries.

McCarty described those actions as a "pervasive practice," and promised a "broader investigation looking at the largest insurance companies in America." He said the end result would involve 40 companies representing 92% of all the life insurance and annuities in the country.

'Track down anybody'

Regulators who attended the meeting sounded incredulous that MetLife and other life insurers couldn't track down missing beneficiaries when they didn't come forward. Usually it's the beneficiary's obligation to find the insurance company after an insured person dies. But that could change now that regulators are aware that some insurers have used the Death Master File to figure out when to stop paying on annuities, but not when to make payouts to life insurance beneficiaries. It is a situation McCarty calls "a mismatch."

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"You can track down anybody these days," said Pennsylvania Insurance Commissioner Michael Consedine.

McCarty touched on, but didn't elaborate on, whether the investigations and the need to reserve more funds for payouts could have an impact on life insurers' earnings and balance sheets.

MetLife didn't directly refute McCarty's estimate of $1 billion, but indicated that in 2010 it paid out $11 billion to policyholders and beneficiaries and escheated only $51 million to the states.

A safety net

MetLife said it will now use the Death Master File, along with other databases and checks, as a "safety net" to avoid missing any beneficiaries. But insurance regulators seemed unconvinced.

"A safety net is only as good as its ability to catch everyone," said Consedine.

Manulife's John Hancock insurance unit has already settled with both Florida and California, agreeing to improve its practices. The settlements "help John Hancock maintain its place in the forefront of caring for our insureds and their beneficiaries," the company said in a press release.

McCarty said that other investigations would continue. California is expected to hold its own hearing on May 23.

The Florida commissioner said that a team of lawyers would look at the John Hancock agreement and put together a "template" of procedures insurers should follow to maximize the matchups between policies and beneficiaries.

'Insurers know'

"We need to establish model laws and regulations," said McCarty, who is the National Association of Insurance Commissioners' president-elect. The NAIC sets the standards for insurance regulation, which is carried out at the state level.

States began investigating this issue because they believed insurers weren't escheating the funds due them. But McCarty said the real victims were "a lot of folks who don't know that their parents or grandparents had policies. The insurers are the only ones who know."

More on Insure.com and MSN Money:

• Why your life insurance company doesn't care if you're dead
• How to find lost life insurance policies
• Is your spouse secretly taking you off a life insurance policy?
• Get the most from insurance claims
• Lies that could kill your life insurance
• When insurers cry 'suicide'