WASHINGTON BUREAU — State insurance regulators may not have any explicit legal authority to regulate retained asset accounts, according to Robert Hunter, a former Texas insurance commissioner.

Hunter, director of insurance at the Consumer Federation of Insurance, Washington, says the accounts are “extra-contractual,” because there is nothing in the typical life insurance policy that provides for use of the accounts.

RAAs are not insurance products, because offering them involves no transfer of risk, Hunter says.

“Insurance regulators don’t have the right to oversee them, approve them, set standards for them, or anything, nor do the guaranty funds apply,” Hunter says.

Because of the lack of disclosure, the apparent lack of regulatory protection, and the apparent lack of guaranty fund protection, use of RAAs is “very high risk” for life insurance policyholders and policyholders’ beneficiaries, Hunter says.

RAAs are accounts life insurers use to hold beneficiaries’ benefits until the beneficiaries withdraw the cash using checks, payment cards or other means.

Critics say life insurers earn high returns on the cash and pay beneficiaries low rates without giving the beneficiaries adequate notice that the cash is held in something other than a bank account insured by the FDIC. Supporters say RAAs give grieving beneficiaries a chance to deal with their emotions before addressing financial concerns, and that funds guaranteed by an insurer may be safer than bank deposits insured by the FDIC.

In other RAA news:

- The New Jersey Department of Banking and Insurance says its commissioner told Prudential Financial Inc., Newark, N.J. (NYSE:PRU), that the company had “acted properly” in connection with administration of an RAA.

Tom Considine, the state insurance and banking commissioner, approved of the way Prudential had handled a $400,000 life insurance benefit paid in connection with the death of a soldier killed in Afghanistan in 2008, according to Marshall McKnight, a New Jersey department spokesman.

The beneficiary of the policy, and of the RAA, was the soldier’s mother.

Considine issued a statement about the matter in response to a letter Prudential sent him Aug. 4.

Considine told Prudential that the department’s investigation into the case “further reassures this department of the value of ‘retained asset accounts.’”

Robert DeFillippo, a Prudential spokesman, confirmed that Considine had spoken to top officials at Prudential in connection with the Aug. 4 letter. DeFillippo said he could not release the letter because the letter was a confidential communication with regulators.

- Rep. Edolphus Towns, D-N.Y., chairman of the House Oversight and Government Reform Committee, is opening an investigation of Prudential RAAs.

Prudential administers the Service Members Group Life Insurance program for the military and the Veterans’ Group Life Insurance program for the Veterans Affairs Department.

Towns has written to Prudential’s John Strangfeld to tell him about the investigation.

“I am particularly concerned that some families of soldiers killed while serving their country may not understand that they have the right to this money up

front,” Towns says. “It seems unjust that the insurance company can take control of this money without first being granted permission from those it belongs to.”

Towns has asked for extensive information about Prudential’s handling of these life insurance benefits payments.

Towns says he is “particularly interested” in whether the families who get the benefits are fully informed of their options; whether the money is adequately guaranteed; and whether the interest paid on the accounts is adequate.

Towns also cited reports that some merchants may not have honored checks drawn on RAAs.

“Our preliminary investigation indicates that Prudential is not alone in handling life insurance payouts this way,” Towns says. “I will continue to look into what may be a pervasive practice in the life insurance industry.”