What Happens if Someone Bought Life Insurance and Their Family Didn't Know It?

Buying life insurance protects loved ones. If someone dies while their spouse or other family members are relying on their income or services, this could be a huge problem. Once the deceased person's paychecks stop being deposited into a shared checking account, surviving loved ones could be left with a serious financial shortfall. 

Life insurance protects against a financial disaster when an untimely death occurs by providing a death benefit to chosen beneficiaries. A predetermined sum of money is paid out to those left behind, which can be used to repay debt or replace the deceased person's income.

Generally, it falls to the surviving beneficiaries to make a life insurance claim after a death. But, what if the family members of an insured person didn't know there was coverage in place? Here's what can happen in these situations. 

The life insurer might search for beneficiaries 

Life insurance companies may have certain obligations to try to determine when a covered person has died. The National Council of Insurance Legislators adopted a Model Unclaimed Life Insurance Benefits Act in 2011, and many states have adopted this act or have similar regulations in place.

Under this act, life insurers must periodically search a database maintained by the Social Security Administration, called the Death Master File. If the insurer identifies a deceased policyholder in this database and the policy has not been claimed, the insurer is expected to identify the beneficiaries and pay the death benefit to them within 90 days.

Even in states that do not have this legislation, many life insurers still choose to follow this process anyway. And some insurers have also adopted a rule that people are assumed deceased after 120 years (or are assumed dead at another designating "limiting age" as outlined by the insurance policy). If a policy has gone unclaimed when the covered person reached the "limiting age," the insurer would pay the death benefit then. 

The money may be turned over to the state 

If a life insurance policy goes unclaimed for long enough -- perhaps because the insurer could not find any beneficiaries that the deceased had chosen when buying coverage -- then the money from the policy may be turned over to the state.

States may try again to find the rightful beneficiaries of the policy, but eventually the unclaimed money will go to the state treasurer if no one steps forward with a legitimate claim to receive it. 

Obviously, no one wants the state to get the insurance benefit they paid for. And, most people don't want their surviving loved ones to have to wait to get an insurance payout until the life insurer happens to discover a death and find the beneficiaries. To make sure this doesn't happen, those who buy life insurance should tell their families ASAP. Life insurance buyers may also wish to tell another trusted third party, such as a lawyer who is helping them with estate planning. 

By keeping loved ones fully informed, life insurance buyers can ensure their closest friends and family members will have the money they need during a hard time in their lives.