Life insurance is a contract between the owner of the policy, who is usually also the person insured, and the life insurance company. The owner promises to pay the premium. The company promises to pay the claim.
But, the company's promise to pay the claim is usually contingent, not just on the death of the insured, but also on the filing of a claim. Insurance companies have been known to pretend ignorance of the death of the insured. Oddly enough, on annuities, where the death means that the insurance company stops paying money, they are quick to learn of the death. But if the death means that the company has to start paying money, they don't know anything about it until a beneficiary files a claim.
Some states have taken advantage of this setup. Have they pursued to the insurance companies to insist that claims be paid soon after the insured dies?
No, these state governments have thought it was much more in the public interest to require the insurance companies to turn over the proceeds of such policies to the state's own unclaimed property fund. To that end, 35 states have supposedly entered into arrangements with an auditing company to audit the insurers' books. The auditing company, Verus Financial, LLC, will collect a cut of every unpaid policy that is taken over as lost property. Life Insurers Skimp on Payouts: States, W.S.J., Apr. 28, 2011.
What if the beneficiary does not know about the policy? Tough. If no claim is filed, either the company gets to keep the money, or it winds up as lost property, claimed by the state.
How can you keep that from happening to your policy? Simple, name a beneficiary. The safest thing is to name your trust as a beneficiary, because the trust will always be there, no matter what happens. Most importantly, make sure your trustee knows about the policy. We recommend that you include the original policy, and proof of named beneficiaries, in your big red book – your estate planning portfolio.