More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Anti-Fraud Provisions of the Investment Advisers Act RIAs and IARs should view themselves as fiduciaries at all times, whether they meet the legal definition or not. Deviating from the fiduciary standard of full disclosure while courting clients may cause the advisor significant problems.
In 2010, the insurance industry was the target of a lot of bad press regarding retained asset accounts (RAAs) that were provided to the beneficiaries of military service members killed in action.
A midsummer news exposé revealed that many beneficiaries were unaware that what they received at the time of a loved one’s death was not a regular checking account, but a book of checks to be drawn on an insurance company.
The quiet change in policy that was responsible for RAAs being handed out in place of checks was only part of what made everyone so angry. In 1999, in accordance with a verbal agreement with the Veterans Administration (VA), Prudential—the then-provider of benefits for Servicemembers’ Group Life Insurance (SGLI)—began providing RAAs instead of checks when a military member made the ultimate sacrifice. (The policy was not amended in writing to cover this change until 2009.)
An even more bitter pill to swallow was the fact that insurance companies collected more interest on the funds in RAAs than they paid out to the beneficiaries. So was the fact that beneficiaries were often completely ignorant of the fact that they could put the money in a higher-yield vehicle and receive a better rate of interest. On top of that was the news that money in RAAs was not FDIC-insured, although of course death benefits are protected, via each state’s insurance guaranty fund.
Lawsuits were threatened, investigations launched and criticism abounded. (See “Life Insurers Under Fire,” Investment Advisor, November 2010)
Big Apple Bites Back
One of the states to launch an investigation into the matter was New York. Then-Attorney General Andrew Cuomo characterized New York’s action as a “major fraud investigation,” and on Feb. 24, 2012, New York regulators told insurance companies that they should no longer provide death benefits in the form of RAAs to military members’ families by default. The family must request such an account.
And not just military members, either—Superintendent Benjamin Lawsky of New York’s Department of Financial Services said the change applied to “life insurance policies owned by soldiers, veterans and others.”
DFS issued a “circular letter” regarding the issuance of RAAs that instructed insurance companies not to issue them as the default when an insured New Yorker dies and specified “the detailed information that insurers should disclose in a clear and conspicuous manner, so that beneficiaries are fully informed about retained asset accounts before they elect how benefits will be paid.”
Beneficiaries should be provided with an extensive list of disclosures, it said, that informed them of the payout options available, a detailed explanation of the way RAAs work and the limitations of drafts connected with RAAs, as well as noting upcoming changes in the interest rate paid on funds held in RAAs.
However, the main point remains that insurers should provide as the default option, and whenever a beneficiary does not choose an option, a check for the full amount of the payout.
In a statement, Lawsky said, “People buy life insurance to protect their loved ones after death. New York’s new standard ensures that beneficiaries will receive the full amount of life insurance proceeds immediately, unless they expressly choose another option. Our soldiers, veterans and their families, as well as all New Yorkers, deserve to get from the life insurance companies exactly what they paid for. The companies should not be padding their profits at the expense of the needs of New Yorkers.”
The American Council of Life Insurers (ACLI) disputed Lawsky’s characterization of RAAs in a statement in response to the New York decision that said, “A retained asset account has all the benefits of a lump sum payment and more. Beneficiaries have full access to the money in their accounts and can withdraw the money immediately or at a later date. Money in [RAAs] earns interest that is comparable to other on-demand accounts. This interest begins to accrue the moment the retained asset account is established. Even beneficiaries who withdraw all of their money immediately will earn some interest from the account. [...] We continue to believe that RAAs are the best default option for consumers, and respectfully disagree with the superintendent.”