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Some life insurers, including the insurers that run the group life programs for military personnel and federal civilian employees, use "retained asset accounts" to hold life policy proceeds. The accounts are not bank accounts insured by the Federal Deposit Insurance Corp. (FDIC), and the interest rates paid are often lower than the rates paid by commercial banks.
Bloomberg Markets magazine is promoting an article, “Fallen Soldiers’ Families Denied Cash As Insurers Profit,” that calls the retained asset accounts “a secret profit center for the life insurance industry.” NPR has also covered the story.
U.S. insurers hold about $28 billion in 1 million insurer-managed death benefit accounts, and the insurers earn the equivalent of a corporate bond rate on the cash in the accounts, according to Bloomberg.
Insurers and state regulators say retained asset accounts are legal, Bloomberg says, but the magazine found legal experts who question whether holding death benefits in non-insured accounts is legal, and insurers may not explicitly tell beneficaries that funds are being held in something other than an FDIC-insured account, Bloomberg says.
Bloomberg cites the story of a 24-year-old Army sergeant who was killed by a roadside bomb in Afghanistan. A unit of Prudential Financial Inc., Newark, N.J. (NYSE:PRU), held the $400,000 death benefit in a general corporate account and earned investment income on the cash. A Prudential Alliance Account paid the mother of the sergeant an interest rate of 1% in 2008, while Prudential collected a 4.8% return on its corporate funds, Bloomberg says.
The American Council of Life Insurers (ACLI), Washington, says published reports have cast a negative light on retained asset accounts and given the benefits the accounts provide short shrift.
Life insurers usually let beneficiaries choose between using a retained asset account, getting a lump-sum payment, or getting a series of payments, and the retained asset account option can be a useful one for beneficiaries who are facing the loss of a loved one, the ACLI says.
“Not surprisingly, financial matters may not be the first thing on their minds, and
retained asset accounts provide a secure place for life insurance policy proceeds to be held until the money is needed,” the ACLI says.
When the cash is in a retained asset account, the beneficiary can choose to withdraw the full amount immediately, take partial withdrawals, or withdraw the full amount at a later date, the ACLI says.
Although the accounts are not backed by the FDIC, the accounts are “backed by the full strength and claims-paying ability of the life insurance company," the ACLI says.
State insurance departments regulate life insurers’ investment practices carefully, and they "will act quickly to protect consumers at the slightest hint of financial difficulty,” the ACLI says.
The ACLI notes that the National Association of Insurance Commissioners, Kansas City, Mo., approved a retained asset account model bulletin in 1994. The model requires insurers to tell consumers about the important features of the account, the tax implications of using an account, and the interest rate payments.
The ACLI also is defending the interest rates insurers pay on the accounts.
"Life insurers invest assets for retained asset accounts in their general accounts, generally in low-risk, conservative investments, to ensure the money is available on demand,” the ACLI says. “The rate earned by the account is comparable to similar on-demand accounts and is typically guaranteed by the insurer not to drop below a certain level. Beneficiaries can a
ccess their money at any time and transfer it to a bank account, CD or other investments with a higher interest rate.”.