The Office of General Counsel issued the following informal opinion on October 10, 2002, representing the position of the New York State Insurance Department.
Re: Interest on Proceeds of Life Insurance Policy when Beneficiary is a Minor
How is interest computed on the proceeds of a life insurance policy? Must a claim be fully filed with the life insurer for interest to begin to accrue?
Pursuant to N.Y. Ins. Law § 3214(c) (McKinney 2000), interest upon the principal sum paid to the beneficiary of a life insurance policy shall be computed from the date of death of the insured to the date of payment, and not from the date that the claim is fully filed with the life insurer.
An individual who died on April 23, 1990 owned a group life insurance policy that named his grandson as beneficiary. The beneficiary was only five years old at the time of his grandfathers death. (It is presumed that the group life insurance policy was issued in New York State and subject to New York law). The wife of the deceased informed the employer about the death and completed all sections of the claim form except for the legal guardian information. This was because the beneficiary had no legal guardian. She also provided two certified copies of the death certificates to the employer. The employer advised that the life insurer was unable to pay the claim until the beneficiary turned 18 years old or had a legal guardian.
The beneficiary will be turning 18 years old in the near future, and recently began tracking down the proceeds of his grandfathers life insurance policy. After difficulty and time, the insurer and employer were able to locate the policy information. Apparently, given the fact that the beneficiary was a minor and had no legal guardian, the insurer did not process the claim at the time of death.
The life insurer now claims that interest only accrues after all paperwork for the claim has been completed and fully filed with them. However, the form could not be completed because the beneficiary had no legal guardian information at that time. The issue here is one of computation of interest on the proceeds of a life insurance policy.
N.Y. Ins. Law § 3214(c) (McKinney 2000), governs the interest rate and computation of such rate to be paid upon a life insurance death claim. Section 3214(c) provides that:
If no action has been commenced, interest upon the principal sum paid to the beneficiary or policyholder shall be computed daily at the rate of interest currently paid by the insurer on proceeds left under the interest settlement option, from the date of death of an insured or annuitant in connection with a death claim on such a policy of life insurance or contract of annuity and from the date of maturity of an endowment contract to the date of payment and shall be added to and be a part of the total sum paid. (emphasis added)
Therefore in New York, interest begins to accrue from the date of death of an insured, not from the date that the claim had been fully filed with the life insurer.
In addition, under the interest settlement option, the interest rate would be determined by the rate in effect as of the date of death, not by the rate in effect on the date of payment of proceeds. Furthermore, the interest would be calculated by whatever rate is in effect on each day under the interest settlement option, from the date of death to the date of payment. Thus, the rate is subject to whatever rate fluctuations and changes occur during that period of time. It should be noted that many insurers only change the interest rate in effect under the interest settlement option on an annual basis.
For further information, you may contact Senior Attorney Meredith S. Kaufer at the New York City Office.