Retained Asset Accounts
70MetLife, New York Cith
What is a Retained Asset Account and why is it a bad deal for you?
A while ago, a woman I know lost her husband. In the midst of all that she had to deal with, the life insurance company sent her a checkbook to an interest-bearing account they had set up for her and they had placed all of the proceeds of his life insurance in the account. All she had to do was write checks whenever she needs some of the money.
After things settled down a bit, she decided to move his investment account to a company she had more confidence in so she called and asked to close out the account. Again, instead of sending her a check for the proceeds, they sent her a checkbook on an interest-bearing account so she could write checks as she wished.
On the face of it, it sounds like the companies are providing a nice service for people. The insurance companies argue that the accounts allow time for the bereaved to decide what they want to do and keep the money in a safe place for them while allowing easy access. According to Bloomberg Businessweek:
"MetLife and Prudential keep the death benefits in their cooperate accounts and issue IOUs, which they call “checkbooks,” to survivors. Carriers profit by investing the funds in bonds and keeping the difference between returns and the interest they credit to the beneficiaries."
On July 29.2010, Attorney Genera Andrew M. Cuomo of New York, announced his office has launched a major fraud investigation into the life insurance industry for practices that appear to have denied grieving military families and others of millions in life-insurance cash.
“It’s disgraceful on the part of insurance companies,” Sen. John McCain said in an interview on Bloomberg Television. “We’ll obviously have to be looking into it.”
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Follow the Money
So, what is the problem with this arrangement? Currently the insurance companies hold approximately $28 billion in Retain Asset Accounts (RAAs). There are several issues with the practice.
First, it creates another step between the beneficiary and the benefit that the deceased intended them to have. Now, the survivor has to deal with moving the money or deciding to leave it in the hands of the insurance company.
Secondly, while it may seem safe there, the funds are NOT FDIC insured. It appears that the funds are maintained in the general funds of the insurance companies and invested alone with the company’s other investments. The only actual assurance of safety is the various state regulations, which govern insurance companies on a state-by-state basis. If they were maintained in FDIC escrow accounts, they would be beyond the reach of the insurance companies and not only safer but earn more interest. The insurers are likely to pay an interest rate of about 0.5% while they are investing the funds at much higher rates. Now the motivation for this practice becomes very clear. Consider that you could be investing that money yourself and making much more on it even if you only put it in a long term CD.
Third, the checking accounts the companies are issuing the beneficiaries are in reality IOU’s and the funds are not actually disbursed until the checks are written. There is something patently misleading if not dishonest about the practice.
Personally, I would prefer that the insurance company simply send me a check that I can then deposit and manage as I see fit. At that point, I would feel that the company has kept its word and treated me fairly and honestly. There is a reason why the Insurance companies call these accounts “Retained Assets.”
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You did not say anything I could argue with. As one man said recently on NPR, "if I have to come back as a company in my next life, let it be a life insurace company. They never lose money."
I think I've lost all faith in 'insurance' companies. I think they are only there in theory and they really don't mean to pay out anything after all - EVER! Great information though sad!
it's one of those cases where, if you know what is really happening, you can make it work for you.
1. How much harder is it to write a check to yourself to deposit, than endorse a check that the insurer wrote out and sent to you? And you earn interest during the float.
2. For safety? How many banks have failed vs. how many insurance companies have failed?
And if you are looking for return, do you want your money in a demand deposit type account at about what you can get in your savings account or do you want it tied up in a 'long term CD'? Tie it up in a long term CD and you will get better return. But you will be tied to that CD for a 'long' time. And you can use one of your checks to buy that 'long term CD' if that is what you want.
3. But it is an interest bearing account. Are the funds 'dispursed' when you write a check on your checking account? Not until the check is presented for payment. Is that also 'patently misleading if not dishonest'?
It is sad that a disreputable reporter (the original Bloomberg reporter) has created such a stir about nothing.
I approved your comment so that people could see "the other side". From your Id, you are apparently associated with the insurance industry and I appreciat your opinions. However, I totall disagree with your points:
1. It is not any harder to write a check to yourself. The problem is that, people in the midst of grief and insecurity, tend to not do that, They tend to leve the money sitting in the "Retained Assedt account." The name, by the way is the Insurance companies' and refrrs to THEM RETAINING THE ASSET to THEIR advantage.
2. Ask the people who depended on insurance companies during Hurricane Katrina how reliable major insurance companies are. I don't wnat my security resting in their hands when I am old. Who's interest do you think is most important to them yours or theirs?
There are alternatives to long term CD's. Personally, I would put it into a managed investment account at a place like Fidelity where I can draw it as I need it and I get markedt rates according to my risk tolerance- much better than a savings or CD account and a whole lot bette than the token interest paid by the insurance companies.
3. I don't understand your third point. It just shows how the insurance companie hangs onto your money as long as possible- my point precisely. As for the Bloomburg reporter, it appears that the facts of the article were correct and have also been reported by other news services. I first heard the story on NPR. It's a case of dont shoot the messenger becaus you don;t like the message.
Thanks for approving my comments.
I am associated with the insurance industry but am not involved with a company that has RAA's, so I feel I have a little independence.
Your response to #1 is part of the reason that RAA's were created. People 'in the midst of grief and insecurity' get large checks from insurance companies and either simply hold on to them without cashing them, deposit them into their FDIC insured savings (even though many of these payouts would exceed the maximum FDIC insured sum) or may have unscrupulous people trying to influence them as to what to do with the windfall at a time when they can be easily manipulated.
You sound like you have some knowledge financially and are comfortable handling your own investments. I would expect that if you received a death benefit via an RAA you would immediately write out a draft for the full amount and deposit into an investment account where you would manage your money as you see fit. This is probably what a majority of the people who get RAA's do. But for those without your understanding, having time to get over the grief to the point that they can sit down with a knowledgeable trusted financial adviser under no pressure can be a benefit to them.
I am sure you know the difference between life insurance companies and P&C insurance companies. The companies that are getting their name associated (in a negative way) with this RAA issue are some of the most stable, most secure companies in the world, not just in the US. If someone is worried that their money might be at risk in an RAA at the Pru or MetLife, there are hundreds of thousands of people who would have much of their retirement savings and other life insurance at risk. I would suspect that an RAA is about as risky as any life insurance policy from the same company.
One of the things that the Bloomberg article implied was that Prudential was stealing from dead soldiers families because they were earning 5.something% on their corporate account while only paying 0.5% on the RAA. The problem with this is that insurance companies must because of proper risk management, match assets and liabilities. The insurance company has a liability in an RAA for the full amount in the account and must have that money in a very safe, very liquid asset. This is probably going to be something like a 90 day or less T-bill. And I imagine you know what 90 day T-bills are currently yielding. No where near 5%. But if you put your money in the bank, do you think the bank is not investing it in something that is going to yield something greater than what they pay you? Of course they are. No one is going to pay you the same interest they earn and to compare the average of an insurance companies corporate account which has a moderately long average duration, to what they pay on a demand type liquid account is a distortion at the least and an outright lie at worst.
Yes, insurance companies, like investment firms and banks want to hang on to your money as long as possible because the longer they have it the more money THEY make.
I did read this on a blog from the National Underwriter:
Sources within the industry tell me that the article that kicked all of this off was not entirely on the level. They tell me that the primary sources consulted for the piece are unhappy with how their quotes have appeared, and the author of the story himself has a bad record with the truth, having been sued for libel previously. Libel is no joke as a journalist. To get cut off from future access to a source isn’t unheard of if you write unflattering stories. But sued for libel? Must have been some story, is all I can say.
I don't have a problem with a reporter writing an article that points out deficiencies in a product offered by an industry, but it just seems that this author (and most that have followed have not done much in the way of independent verification of the conclusions just the facts) went out of his way to tar and feather an industry unjustly.
You make a good case for the companies but I still think people are generally better off putting their money in other places and that the Insurance companies should, at the least, offer an option to use the RAA or simply get a check.
billyaustindillon Level 2 Commenter 21 months ago
Good hub on retained asset accounts - it sounds like another insurance grab on the vulnerable to me.