can insurance company do this

i recently found policy my mother had purchased 4 months before she died. it was a 12 month term policy the premium paid at the time of purchase 04-04-02 i contacted the company who by now had been sold and purchased by another company. the first time i was told very rudely that they did not have record of it and did not have to keep records this far back. i said so this policy is no good because you don't have record them she says send us a receipt. i faxed the policy, application and receipt. i never got a return call so i called them and again i was told they could not find this policy because their records only went back to 2005 and statue of limitations does not require them to go back that far. i asked them if statue of limitations applied to filing a claim and was told they would have to do more research and a supervisor would return my call. well the next day a supervisor called me back and stated that they had records from Feb.2003 when they acquired the company and they had no record of the policy. she stated that the policy had either been paid or cancelled and the premium returned . i told her that i was the beneficiary and it had not been paid to me and then she said to call the funeral home they may have got the benefit i told her that i had receipts showing my mothers funeral had been paid in full by her family and how could it have been paid when i just found the policy in a box 7 years after she died. i asked her to prove to me that this had been paid or cancelled and she again said there records did not go back that far and that is all they could do. i am considering hiring an attorney but the policy face value is $4000 and it would probably cost more to fight them in court and still may not get the claim paid. any advise would be greatly appreciated. i did report this to my state department of insurance.