Life insurance death benefit feature becomes controversial

By Jim Connolly on January 4th, 2011

During the summer of 2010, a sleepy feature available to beneficiaries of life insurance policies for over 20 years came into focus. The issue, retained asset accounts (RAAs), and whether and how they should be made available to those receiving funds after a loved one dies continues to generate discussion both at the state level and in Congress.

According to the National Association of Insurance Commissioners, an RAA is meant to be a short-term repository for a life insurance death benefit that gives a beneficiary time to consider the financial options available. An RAA allows a beneficiary to draw from the death benefit proceeds by using bank drafts, which are similar to checks but different in a few ways.

What consumers advocates are saying about RAAs

Consumer advocate Daniel Schwarcz, an associate professor of law at the University of Minnesota Law School and a funded consumer representative with the NAIC, Kansas City, Mo., says "If it were me, I'd take the money and put it in a bank account."

Schwarcz says that one of the important points a consumer should double check before agreeing to an RAA is the ability to immediately draw on funds using the checks a company provides.

Another important point to keep in mind, he says, is that the accounts are not protected by the Federal Deposit Insurance Corporation (FDIC), the entity that acts as a backstop in the event a bank fails and cannot meet its obligations. He affirms that insurance companies have guaranty fund associations, state entities that step in when an insurer becomes insolvent and assumes the role of making sure that policyholders are paid. But, Schwarcz adds, they are run individually by the different states and are not as reliable as the FDIC.

Other insurance industry experts state RAAs may have benefits

Connecticut Insurance Commissioner Tom Sullivan, one of the commissioners spearheading the NAIC examination of the issue, disagrees, noting that most state guaranty funds offer at least $300,000 in protection and in some states such as Connecticut, up to $500,000. The NAIC is wrapping up a survey of the largest companies on the issue to examine practices, such as defaulting a beneficiary into an RAA account and what disclosures are provided along with this option.

Robert DeFillippo, a spokesperson for Prudential Financial, Newark, N.J., says that there is a lot of good that comes out of the RAA, and counters criticism of the RAA feature by noting that beneficiaries have immediate access to their money and can write a check for the whole amount of the death benefit if they choose.

DeFillippo adds that allegations that RAA checks are more difficult to cash, has not been Prudential's experience. Of 500,000 drafts written in 2009, he points out that the "vast majority have had no problems." He says that when an RAA is opened at Prudential, disclosures clearly explain how it works and the fact that the money is available immediately. While the death benefits are in an RAA, they are drawing interest.

Life insurance beneficiaries seem to make use of RAAs

According to Prudential, about 40 percent of the money held in its RAAs is withdrawn in the first two months and typically, 70 percent of account holders write at least one check within the first three months after an account is opened.

During a hearing by state insurance regulators in August 2010, MetLife testified that a third of those who have accounts with the life insurance company close them within two months, and 60 percent withdraw all the funds and close them within a year. Interest on the balance of RAAs begins to accrue right away and ranges from 3 percent to 1.5 percent to 0.5 percent--depending on the age of the policy. Nearly half of those who have these accounts with MetLife are earning 3 percent on their money and 80 percent are earning at least 1.5 percent, according to information presented during the hearing.

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