Corporate Close-Up: Death Master File Searches Mandated for Unclaimed Life Insurance Proceeds

The Social Security Death Master File (“DMF”) has become a relevant force in the world of unclaimed property “outside the context of audits, where contract audit firms like Verus Financial LLC and Kelmar Associates, LLC have been employing the DMF for several years as a ‘diagnostic tool,’” according to Kendall Houghton, a partner with Aston & Bird LLP who leads the firm’s state and local tax practice, in analysis provided as expert commentary.

In July, the Uniform Law Commission (ULC) approved a new version of the Uniform Unclaimed Property Act (UUPA) for the first time since 1995. On Nov. 16, the ULC finalized the Act. Among other various provisions, the ULC updated the UUPA provisions regarding unclaimed proceeds of life insurance policies. These provisions largely involve searches of the DMF that are consistent with the provisions in the National Conference of Insurance Legislators (NCOIL) Model Unclaimed Life Insurance Benefits Act. Some states have already adopted similar provisions to the NCOIL model act, and others are likely to do so in 2017.

The dormancy period for unclaimed proceeds from insurance policies usually begins running when the money from the policy becomes due or payable, which life insurance providers have contractually predicated upon receipt of proof of death of the insured. Under the provisions of both the 1995 and 2016 versions of UUPA, the dormancy period is three years after the after the obligation to pay arose for amounts owed by insurers on life or endowment insurance policies. However, the new version of UUPA further specifies that, for policies or contracts for which an amount is owed on proof of death has not yet matured by the proof of death of the insured or annuitant, the dormancy period starts to run three years after the earlier of the date the:

  • insurance company has knowledge of the death of the insured or annuitant; or

  • insured has attained, or would have attained if living, the limiting age under the mortality table on which the reserve for the policy or contract is based.

The ULC further provides new rules for knowledge of death of the insured or annuitant—in other words, the 2016 UUPA clarifies that receipt of proof of death is not the only method by which an insurer will be deemed to “know” the insured is dead and the policy is due and payable. The new rules state that an insurance company has knowledge of the insured’s death when an insurer has made a comparison of the names of the company’s insureds to the U.S. Social Security Administration’s Death Master File, or a service that is at least as comprehensive, and found a match.

However, the ULC did not mandate procedures for these DMF searches with respect to outstanding policies and endowment products, nor did the ULC establish criteria for matches (i.e., when the insured would be deemed deceased based upon their name appearing on the DMF).  Houghton, a co-author of BBNA Portfolio 1600: Unclaimed Property (available to Bloomberg BNA subscribers), pointed out,  “The DMF database has been proven to have a not immaterial error rate. For example, names appear on the DMF database where the individuals are not deceased, and conversely, the DMF may not contain the names of all deceased U.S. citizens.”

Houghton explained, “The ULC was aware of this fact but based its decision not to mandate DMF searches as a part of an insurer’s unclaimed property compliance obligations under the rationale that those rules would be better established under state insurance laws and pursuant to the state insurance regulators’ oversight.” The new UUPA rules provide that a DMF match does not constitute proof of death for purposes of submission of a claim by beneficiaries, but that if an insurer has conducted a DMF search and comes into possession of an apparent death match as a consequence, that insurer must make documented good faith efforts to validate the death within 90 days of notice of the death resulting from the DMF match.

While the 2016 revised version of UUPA has not been adopted in full in any jurisdiction, states have already passed legislation in their insurance codes to require that insurers make regular searches of the Social Security Death Master File. These search procedures in the new version of UUPA are consistent with the NCOIL Model Unclaimed Life Insurance Benefits Act, which has been a driving force behind several states updating their insurance laws to require searches of the DMF.

On Aug. 26, Illinois enacted H.B. 4633, which, beginning Jan. 1, 2017, requires life insurance providers in Illinois to compare the list of their insured customers and policies with the DMF at least once by Dec. 31, 2017, and at least semiannually every year afterwards.

When a match is found, insurers are required within 120 days (when they have not been contacted by a beneficiary) to determine whether benefits on the policy are due, and if so, use documented good faith efforts to locate the beneficiary or beneficiaries. The rules require that if beneficiaries or owners cannot be found, the benefits are reported and delivered to the state treasurer under the state’s unclaimed property laws, which provide that the dormancy period for life insurance proceeds is five years from the date payable.

On Nov. 3, Pennsylvania joined Illinois and passed a very similar set of rules under the state’s insurance statutes in H.B. 1403. However, Pennsylvania conforms to the NCOIL Model Act and consistent UUPA rule that insurers make documented good faith efforts within 90 days of a potential match, rather than the Illinois standard of 120 days. Additionally, Pennsylvania provides rules for exemptions due to hardship and a grace period for time for implementation of electronic searchable record systems, as well as several exceptions to the requirements for DMF searches, including federal employee benefits programs and policies to fund funeral or burial services.

While these insurance provisions have rendered insurers’ practices more robust in connection with assessing whether outstanding insurance contracts may in fact be due and payable, some have been critical of the new UUPA stance on insurance proceeds. In comments addressed to the ULC Drafting Committee to Revise UUPA, Sen. Elizabeth Warren (D-MA) opined that while the current draft permits the use of searches of electronic databases, the law does not require unclaimed property holders to use the database. The letter also stated, “[the] ULC should take a stricter stance on forcing insurance companies to use electronic methods to confirm whether a property owner is dead,” in the context of unclaimed property regulation, pointing out that “requiring a relative or other party mail in a death certificate is an unnecessary hurdle that decreases the chance that claimants will be reunited with their property.” Warren’s letter suggested that the time between abandonment of the property and the deeming of the property unclaimed be shortened, believing that this “would expedite the process of returning the property to its rightful owner.”

Houghton noted that, “The ULC’s 2016 Uniform Unclaimed Property Act should not be viewed in a vacuum, given the fact that most states—similar to Pennsylvania and Illinois—have been in the process of adopting the DMF search requirements as part of their insurance regulations, and the insurance and unclaimed property rules should work together in the fashion that Sen. Warren proposed.”

As more states recognize the potential to gain from the increase of proceeds owed to life insurance beneficiaries—or, for the states to establish custody over unclaimed life insurance policy benefits—more legislation is sure to follow. These laws could have even farther reaching effects on insurance law, as the requirement for comparison to electronic databases such as the DMF could speed up the transitional process of digitalization of records in the insurance industry.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should states require insurance companies to search the Social Security Death Master File for purposes of Unclaimed Property?

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