Don't Take Life Insurance Payouts for Granted (U.S. News & World Report)

Getting the desired life insurance to deal with estate considerations, heirs, and the financial protection of loved ones has long been a major goal advocated by financial planning experts. Yet, seldom is much attention paid to guaranteeing that beneficiaries actually receive their entitled death benefits. And if it's your life insurance that's involved, of course, you're not going to be around to check up on how things went.

The assumption that life insurance payouts will always proceed as intended is being questioned in an expanding set of state investigations, centered primarily in Florida and California. Both states have called hearings to explore life insurer practices in paying death benefits. Several companies have been called so far to participate, including MetLife and Nationwide Financial Services. John Hancock, a unit of Manulife Financial, has already signed a settlement agreement concerning its practices.

[See 10 Ways to Boost Your Social Security Checks.]

The two states are part of a broader, 35-state group assembled to explore whether states are missing out on possible revenue from unclaimed life insurance payments. As reported in the Wall Street Journal, recessionary pressure on state finances prompted the search for new revenue sources.

The proceeds of life insurance policies can be secured by states if the policy benefits are not claimed for several years. In some cases, the states allege, life insurers have fallen down in their efforts to locate beneficiaries and have dragged their feet on informing the states of unclaimed policies.

California audited the practices of 21 life insurers and says it found a pattern of troubling behavior. According to a recent statement from the office of state controller John Chiang:

"The audit revealed an industry-wide practice of companies failing to pay death benefits to the beneficiaries of life insurance policies. Instead, companies would draw-down the policies' cash reserves in order to continue collecting premium payments from the deceased. Once the cash reserves were depleted, the company would cancel the policy. The audits also found that insurers did not routinely cross-check the owners of dormant accounts with government databases listing the deceased. In other cases, the company had direct knowledge of the death of a policy owner, but still did not notify the beneficiaries."

Hancock has entered a settlement agreement with 23 of the 35 states, including California, under which it agreed to expand efforts to resolve unclaimed property issues. However, it said it was "outraged" by the California controller's "unfounded allegations and characterizations" and said the statement from the controller's office "violated the very agreement that it negotiated and signed with John Hancock."

[See 5 Reasons You Need a Long-Term Care Plan.]

MetLife and Nationwide have defended their practices while pledging to cooperate with state investigators. While the extent of unclaimed policies has not been publicly documented, the investigations have highlighted the need for life insurance policyholders to take steps to avoid claims-paying problems in the event of their death.

In particular, consumers need to be aware that the legal obligation to trigger a life insurance death-benefit payment rests with policy beneficiaries, not the insurance companies. Companies may, to varying degrees, make efforts to contact beneficiaries. But there may be no contractual requirement to do so.

To make sure your life insurance benefits are paid according to your wishes, experts suggest several basic precautions:

1. Beneficiaries. Make sure your beneficiary choices are clearly identified in your policy, including their names, addresses, and Social Security numbers. Review beneficiary details regularly, and update beneficiaries and their contact information as needed. This should include primary and contingent beneficiaries.

2. Records. Keep multiple copies of your life insurance records in different places. Consider an online storage site for digital copies of all your key financial records. You can pay a back-up company to provide this service or do it yourself, using Google or another free "cloud" storage site. (Note: Experts warn that policies should not be kept in safe deposit boxes, because boxes routinely are sealed upon death and may not be accessible for some time.)

[See How to Overcome 12 Retirement Challenges.]

3. Communications. If you died tomorrow, would your beneficiaries have the information they needed to file life insurance claims? The odds are, they would not. We're uncomfortable with death-related discussions and planning. Get over the discomfort. Send them policy details. Consider giving them password access to your digital records. Think about how much your family and heirs would appreciate your help in being able to carry out what are, after all, your wishes.

4. Next steps. If you have a financial planner, personal attorney, or even a life insurance agent, enlist their help in making sure your beneficiaries can quickly file claims on your life insurance policies. If you don't have a third party to help, consider sending "next step" information directly to your beneficiaries. Where can they get copies of your death certificate? What are the insurance company addresses to which the certificate (a certified copy is needed) and policy claims should be submitted?

Twitter: @PhilMoeller

Browse your computer here

Don't Take Life Insurance Payouts for Granted (U.S. News & World Report)

Getting the desired life insurance to deal with estate considerations, heirs, and the financial protection of loved ones has long been a major goal advocated by financial planning experts. Yet, seldom is much attention paid to guaranteeing that beneficiaries actually receive their entitled death benefits. And if it's your life insurance that's involved, of course, you're not going to be around to check up on how things went.

The assumption that life insurance payouts will always proceed as intended is being questioned in an expanding set of state investigations, centered primarily in Florida and California. Both states have called hearings to explore life insurer practices in paying death benefits. Several companies have been called so far to participate, including MetLife and Nationwide Financial Services. John Hancock, a unit of Manulife Financial, has already signed a settlement agreement concerning its practices.

[See 10 Ways to Boost Your Social Security Checks.]

The two states are part of a broader, 35-state group assembled to explore whether states are missing out on possible revenue from unclaimed life insurance payments. As reported in the Wall Street Journal, recessionary pressure on state finances prompted the search for new revenue sources.

The proceeds of life insurance policies can be secured by states if the policy benefits are not claimed for several years. In some cases, the states allege, life insurers have fallen down in their efforts to locate beneficiaries and have dragged their feet on informing the states of unclaimed policies.

California audited the practices of 21 life insurers and says it found a pattern of troubling behavior. According to a recent statement from the office of state controller John Chiang:

"The audit revealed an industry-wide practice of companies failing to pay death benefits to the beneficiaries of life insurance policies. Instead, companies would draw-down the policies' cash reserves in order to continue collecting premium payments from the deceased. Once the cash reserves were depleted, the company would cancel the policy. The audits also found that insurers did not routinely cross-check the owners of dormant accounts with government databases listing the deceased. In other cases, the company had direct knowledge of the death of a policy owner, but still did not notify the beneficiaries."

Hancock has entered a settlement agreement with 23 of the 35 states, including California, under which it agreed to expand efforts to resolve unclaimed property issues. However, it said it was "outraged" by the California controller's "unfounded allegations and characterizations" and said the statement from the controller's office "violated the very agreement that it negotiated and signed with John Hancock."

[See 5 Reasons You Need a Long-Term Care Plan.]

MetLife and Nationwide have defended their practices while pledging to cooperate with state investigators. While the extent of unclaimed policies has not been publicly documented, the investigations have highlighted the need for life insurance policyholders to take steps to avoid claims-paying problems in the event of their death.

In particular, consumers need to be aware that the legal obligation to trigger a life insurance death-benefit payment rests with policy beneficiaries, not the insurance companies. Companies may, to varying degrees, make efforts to contact beneficiaries. But there may be no contractual requirement to do so.

To make sure your life insurance benefits are paid according to your wishes, experts suggest several basic precautions:

1. Beneficiaries. Make sure your beneficiary choices are clearly identified in your policy, including their names, addresses, and Social Security numbers. Review beneficiary details regularly, and update beneficiaries and their contact information as needed. This should include primary and contingent beneficiaries.

2. Records. Keep multiple copies of your life insurance records in different places. Consider an online storage site for digital copies of all your key financial records. You can pay a back-up company to provide this service or do it yourself, using Google or another free "cloud" storage site. (Note: Experts warn that policies should not be kept in safe deposit boxes, because boxes routinely are sealed upon death and may not be accessible for some time.)

[See How to Overcome 12 Retirement Challenges.]

3. Communications. If you died tomorrow, would your beneficiaries have the information they needed to file life insurance claims? The odds are, they would not. We're uncomfortable with death-related discussions and planning. Get over the discomfort. Send them policy details. Consider giving them password access to your digital records. Think about how much your family and heirs would appreciate your help in being able to carry out what are, after all, your wishes.

4. Next steps. If you have a financial planner, personal attorney, or even a life insurance agent, enlist their help in making sure your beneficiaries can quickly file claims on your life insurance policies. If you don't have a third party to help, consider sending "next step" information directly to your beneficiaries. Where can they get copies of your death certificate? What are the insurance company addresses to which the certificate (a certified copy is needed) and policy claims should be submitted?

Twitter: @PhilMoeller

Browse your computer here

Why Aren't Banks Justified in Boosting Dividend Payouts? (The Motley Fool)

With the Federal Reserve finally giving its consent for big banks to increase dividend payments, everyone is heaving a sigh of relief well, almost everyone.

Credit rating agency Standard & Poor's seems to have different ideas.

The immediate results
With several big banks coming up with plans to raise their dividends and buy back stock, it seems that the financial crisis is firmly a thing of the past. Economic recovery aided by strong operating profits in the financial sector has no doubt helped the big banks pass the dividend stress tests.

Let's put things into perspective. According to revisions in the GDP last week, the finance sector accounts for 30% of all fourth-quarter operating profits for 2010. Considering the recency of the financial crisis, this is definitely a positive thing for the banks, especially because this sector contributes less than 10% to the overall GDP.

In absolute numbers, finance profits jumped to $426.5 billion. It's agreed that the financial sector led the way into the recession, but now the same sector is leading the way out. Shouldn't they now be entitled to return capital to shareholders?

Not according to credit rating agency S&P. The reason: The economic crisis is not fully over and banks still don't have the balance sheet strength to afford returning capital to shareholders. The agency said that banks need an 8% risk-adjusted capital ratio to make sure that another financial crisis is avoided, and it argues that banks still fall short of the target on an average which read 7.6% at the end of 2010.

The performance
So how exactly are the banks placed? The big banks have definitely recovered. Let's have a look at their capital ratios individually.

According to Basel III norms -- the new global standards set following the financial crisis for adequacy in bank capital requirements, liquidity, and leverage -- the minimum tier 1 capital ratio must be 6% and total capital ratio 8%.

Bank of America's (NYSE: BAC - News) tier 1 capital ratio stands at 11.2%, while the total capital ratio is 15.8%. This is not bad. However, the Fed recently blocked its move to increase dividends later this year. This might be because of the bank's huge mortgage business, which is still under particular scrutiny from institutional investors and state attorneys general. Fair enough.

JPMorgan Chase (NYSE: JPM - News) has a tier 1 capital ratio of 12.1% and a total capital ratio of 15.5%. With approval from the Fed, the bank is raising its quarterly dividend to $0.25 a share from $0.05. It also plans to buy back stock worth $15 billion. This bank is behaving like the crisis is almost fully behind it.

Citigroup (NYSE: C - News) has a tier 1 capital ratio of 12.9% and a total capital ratio of 16.6%. The Fed approved its plan to get back to its $0.01 per-share dividend.

Capital One's (NYSE: COF - News) tier 1 capital ratio stands at 11.6%, while the total ratio is 16.8%. The bank has not disclosed the Fed's response on its capital plan, though it will not be raising its dividend this quarter. However, it has managed to dramatically reduce its year-over-year leverage ratio to 8.1%, from 10.3% at the end of 2009, as well as its total asset-to-total equity to a very low 7.4.

Goldman Sachs (NYSE: GS - News) holds a tier 1 capital ratio of 16%, while the total capital ratio stands at 19.1%. Traditionally, investment banks such as Goldman Sachs and Morgan Stanley are supposed to keep higher capital levels since their assets tend to be riskier. The Fed approved the bank's payback of $5.65 billion to Warren Buffett, including the 10% premium, which it borrowed during the financial crisis.

Morgan Stanley (NYSE: MS - News) has a tier 1 capital ratio of 16.6% and a total capital ratio of 16.5%. Another bank yet to reveal the Fed's response, it says it will find profitable ways to use its excess capital, which means it might reinvest it in the business or buy back stock.

What next?
Is S&P justified in issuing warnings that at "this juncture of economic recovery," excessive payouts to investors might hinder capital requirements? Probably yes. It seems the agency, along with Moody's and Fitch (the three major ratings agencies), is particular about not repeating the mistakes, as they were all completely in the dark on the financial collapse in 2008.

My attitude is that S&P is more concerned about stock buybacks and special dividends which might reduce capital levels. That position is justified, despite the fact that these big banks collected substantial profits, because that won't continue forever.

Someone must address the huge leverage big banks employ, as this happens to be one of the primary causes of the downturn. The problem lies with the fact that certain banks take it for granted that they are "too big to fail" and believe a government bailout will always be around. Their claims that capital levels are adequate should therefore be treated critically. There is no harm in being cautious when high unemployment, government cutbacks, and rising oil prices all pose risks to the U.S. economy.

Isac Simon does not own shares of any of the companies mentioned in this article. The Fool owns shares of Bank of America and JPMorgan Chase. Through a separate Rising Star portfolio, The Fool is also short Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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