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Frequently Asked Questions   Lost Life Insurance & Unclaimed Demutualization Compensation


What is demutualization
Why do companies demutualize
Who is entitled to receive compensation
How come I didn't know
How is the amount of compensation determined
Am I entitled to receive unclaimed compensation as heir to a deceased policyholder
Are holders of small face value policies entitled to receive compensation
How does demutualization affect my rights as a policyholder
Are there any long-term benefits of demutualization

How do I make a claim
What happens to unclaimed demutualization proceeds
Is there a time limit on claims
Is demutualization compensation taxed?
What if I have reason to believe deceased family was an policyholder entitled to unclaimed demutualization compensation


What is demutualization?
Demutualization is the process of converting a mutual life insurance company, which is owned by its policyholders, into a publicly traded stock company owned by shareholders, who may or may also be policyholders. A company demutualizes pursuant to a plan of conversion which must be approved by both policyholders and government regulators. In exchange for their ownership interest in the old mutual insurance company, policyholders are entitled to receive a combination of stock, cash, and/or policy credits in the new company.

Why do companies demutualize?
Mutual insurance companies elect to demutualize because as publicly-traded stockholder-owned companies it is easier to raise capital, effect mergers and acquisitions, and to attract and retain employees through the use of stock options.

Who is entitled to receive compensation?
Each companies plan of conversion defines which policyholders are entitled to receive compensation, and there are differences among them. Eligible policyholders generally include those whose policies are paid-up and in force on or before the date of demutualization, and their heirs.

How come I didn't know?
Each plan of conversion from a mutual insurance company to a stockholder owned company specifically addresses what steps must be taken to notify policyholders both of their right to vote on the conversion, and of their potential entitlement to receive compensation for their ownership interest. If you had an unreported change of name (after marriage or divorce) or address, you may not have received the required correspondence. In fact, on average only about 1/3 of those eligible vote. Your entitlement may also have been missed if you are the rightful heir to a policyholder who failed to claim the compensation.

Am I entitled to receive unclaimed compensation as rightful heir to a deceased policyholder?
Yes, heirs are entitled to receive unclaimed demutualization compensation.

How is the amount of compensation determined?
The amount each policyholder is to receive is generally based on a number of factors, including length of time the policy has been in force, face value of the policy, and total premiums paid. For many policyholders, the windfall arising from demutualization can be substantial, and the financial benefits continue to accrue long after a company demutualizes, in the form of an appreciated stock price dividends and stock splits.

Are the amounts substantial - what sort of dollar figures are involved?
The amounts involved vary according to each company's plan of conversion, and where compensation is in the form of stock, how well the demutualized company has performed. MetLife, for example, estimated its unclaimed demutualization compensation at 60 million shares, worth $2,040,000,000 at the current share price. Prudential was unable to locate 1.2 million policyholders and heirs entitled to receive their share of 110 million shares of stock worth over $3.025 billion. More than 400,000 John Hancock policyholders and heirs failed to claim their entitlement of 229 million shares.

Are holders of small face value policies entitled to receive compensation?
The answer is often "yes". Millions of small face value policyholders - including owners and heirs with so-called industrial life and burial insurance - are entitled to collect. Due to poor record keeping, these policyholders constitute a disproportionate share of those who have not yet claimed compensation.

How does demutualization affect my rights as a policyholder?
Demutualization does not affect policy benefits for policies that remain in force. It may, in fact, reduce your policy premiums if some or all of the compensation you are entitled to is in the form of policy credits.

Are there any long-term benefits of demutualization?
As a shareholder in the demutualized company, you may now be entitled to share in the company's profits via stock dividends, and benefit from its growth in the form of an appreciated share price. Your shares may be sold at any time, without affecting policy benefits.

How do I make a claim?
The claims process is simple and straightforward. If you are claiming funds for a deceased family member, you will need to provide proof of death and verification of your entitlement.

What happens to unclaimed demutualization proceeds?
If the demutualized company is unable to locate policyholders or heirs owed compensation within a reasonable period of time set by statute, the unclaimed stock and/or cash is remitted to the protective custody of a government trust account. Thereafter owners or heirs can reclaim their funds from the custodian.

Is there a time limit on claims?
No. The demutualization proceeds, once remitted as unclaimed property to a government custodian, are generally available for claim in perpetuity. Prompt action should be taken, however, as there is a downside to waiting. Unclaimed stock in the demutualized company may be sold by the custodian after a period of time. Thereafter you are entitled only to the proceeds of the sale, not any dividends or price appreciation which occurred after the sale date. This can be a significant loss, as share prices often rise 50% or more in the first year. In addition, you may be subject to capital gains tax on the forced sale, with a tax basis of zero (see below).

Is demutualization compensation taxed?
Current IRS policy, based on Revenue Ruling 71-233, treats these distributions as capital gain income with a zero basis. A lawsuit has been filed against the Internal Revenue Service in Federal Claims Court in Washington, D.C., seeking a refund for taxes paid on stock and cash distributions received when mutual insurers converted to stock ownership. The suit, which seeks class action status, attempts to classify the compensation to policyholders as a return of premiums paid, with a tax basis equal to the fair market value at the date of distribution or the amount of the policyholder investment in the insurance contract, whichever is less.

What if I have reason to believe deceased family was an policyholder entitled to unclaimed demutualization compensation?
If you have reason to believe a deceased family member was entitled to unclaimed demutualization compensation, eventually the proceeds will  be remitted to a government custodian. The statutory length of time that must elapse before the proceeds are turned over is known as the dormancy period. Dormancy periods on unclaimed demutualization compensation vary by state, but generally run one-to-three years.

 

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