In the past, life insurance policy claims were handled simply enough. Once the life insurance company received the proper documents, it sent a check to the beneficiary, who cashed or deposited it at his bank and used the proceeds as he wished.
Today, it’s more likely that a life insurance beneficiary—we’ll call him Charley—would receive something that looks like a checkbook, rather than a single check made out to him. The life insurance company, acting as a financial institution, tells Charley that funds have been set aside for the face value of the insurance policy’s death benefit. Charley could use the checkbook to write checks—called “drafts”—on the account, and the insurance firm would honor those checks just as a bank would. It’s true that Charley would not be allowed to deposit more money into this account; he could only withdraw funds by writing checks. Also, he would not be able to write a check for less than $200. On the other hand, the money that Charley left in the account would collect interest every month.
Charley now owns a retained asset account.
A win-win situation?
The insurance industry believes that its new reliance on retained asset accounts benefit both consumers and life insurance companies.
- Consumers who are life insurance beneficiaries get the flexibility of a checking account. Even better, if they choose to keep their money in the accounts, the fund earns interest—generally, at a higher rate than they would receive on a savings account at a commercial bank or credit union. If they prefer a lump-sum payout, beneficiaries can always write a draft to themselves for the account’s full value.
- Insurance companies also get a bonus out of retained asset accounts. Rather than pay lump-sum settlements to life insurance beneficiaries, they get to keep control of the money for a while longer. Insurance firms invest large sums of money in ways that earn a high rate of return—high enough that they can afford to pay an interest premium for retained asset accounts.
The hidden risks most consumers don’t recognize
Beginning in the 1980s, federal regulations on financial institutions were relaxed to allow banks and insurance companies to have certain overlapping functions. Despite this change in the rules, life insurance companies are not banks. The checkbook you are issued for a retained asset account doesn’t mean quite the same thing as your checkbook for a consumer checking account at your neighborhood commercial bank.
Because of these differences, there are several important ways that the money in a retained asset account may be at risk:
- The insurance company does not actually set aside the money in your account. To be honest, banks don’t set aside your money, either: they use it for lending, investments, and operational costs. But banks and credit unions are required by the Federal Reserve System to have a certain sum of money on hand in cash to meet consumer demand. Insurance companies have no such obligation, because the Federal Reserve does not regulate them. They hold your money in their general funds, and they may not automatically cover the bill when you present one of your retained asset drafts.
- Your account is not federally protected in case of default. The Federal Deposit Insurance Corporation (FDIC) insures that your checking and savings accounts will be reimbursed if your bank goes out of business. There is no similar assurance for a life insurance retained asset account. Life insurance companies downplay this risk, leading one federal judge to say the industry’s marketing practices have been “inherently deceptive.”
- State law may not protect your account, either. Most states have a Life and Disability Insurance Guaranty Fund that will pay policyholders and beneficiaries to the limits allowed under state law when a properly licensed life insurance company fails. It is not clear whether these funds will reimburse beneficiaries who own a retained asset account. When the insurance firm becomes insolvent, there are no assets to redeem the checks from the account; but, because the beneficiary has already redeemed the life insurance policy, there may not be grounds for the state Guaranty Fund to pay the lost money. Additionally, the state Guaranty Funds often have maximum claim limits that can be far less than the amount promised in a retained asset account.
Is legal action necessary?
Some state governments are concerned that consumers do not understand their money may be less safe in retained asset accounts. Other states are outraged that big insurance companies make huge profits from the money they hold in retained asset accounts. Legislation is pending in several states to regulate these accounts or forbid them altogether.
Additionally, there have been some lawsuits filed against life insurance carriers who have issued beneficiaries retained asset account checkbooks, rather than lump-sum payment checks. These lawsuits have alleged that insurance companies failed to fulfill the requirements of some group life insurance contracts, and that they failed to disclose the risks involved in retained asset accounts. So far, the insurance industry has fought off these lawsuits.
If you have a question about retained asset accounts, or if you believe a life insurance company is taking advantage of you as a beneficiary, you owe it to yourself to contact Life Insurance Law at (215) 531-7961. Our network of life insurance benefit attorneys extends across the United States. We have extensive experience fighting the big insurance companies and insurance industry lawyers. We can negotiate with the insurance company or with state regulatory agencies to get you the case settlement that you deserve. Best of all, we never charge you a legal fee unless we can get you a financial recovery.
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Life Insurance Law, LLC is a nationwide network of attorneys who work with clients to recover denied or delayed life insurance claims.
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