The recent retained-asset ruckus provides a textbook case of fact distortion, political grandstanding, pompous righteousness, and overblown accusations.
Retained asset accounts (RAAs) are set up by many life insurers to hold proceeds from life insurance policies for beneficiaries. They clearly profit life insurers by allowing them to hold on to the proceeds of a policy following the death of the name insured. This cushions the hit to their balance sheets of paying off on policies while giving them an opportunity to earn income on the money in the accounts while beneficiaries decide what to do with the funds.
The practice has been going on for decades, and undoubtedly benefits life insurance carriers. But they benefit consumers, too, by reducing the cost of insurance, which helps insurers to hold down the premiums they charge.
The article that started the late round of outrage at this practice hit a few political hot buttons by emphasizing its affect on a highly sympathetic group: the families of fallen soldiers. The article, which appeared in Bloomberg Magazine, suggested the practice was a scam victimizing a class of people whose loss was emotionally compounded by the altruistic sacrifice of their loved ones.
That converted an admittedly self-interested business practice into a sensational issue in which the families of members of the armed services were being victimized by avaricious financial firms.
The article even claimed that life insurers were profiting from this practice “secretly.”
Approximately 5,600 U.S. military have given their lives in Iraq and Afghanistan as of this writing, according to some counts. I don’t know how many of these carried life insurance, but surely it is a tiny fraction of the many life insurance policies that have been paid off by U.S. carriers, for whatever reason.
According to Bloomberg, quoting companies that handle RAAs for about 130 insurance companies, U.S. life insurers are holding at least $28 billion owed to beneficiaries in RAAs
Pointing to the life insurance benefits of dead soldiers, a tiny fraction of that amount, is emotional manipulation. Many Americans who are beneficiaries of life policies are being directed into RAAs.
Meanwhile, many politicians and government officials are stepping into the fray, demanding regulations on how life insurance companies handle the policies of soldiers lost in war.
The implications are that insurers need to be forced to tell families how their soldiers’ insurance proceeds are being invested.
Many detractors are equating RAAs to an outright swindle. The basis for this claim: insurers earn much higher returns on the cash retained from policies than they pay to beneficiaries as interest on their accounts.
A fact that is being dodged by critics of RAAs is that beneficiaries have free access to those funds through a checking account, debit card or similar means. And they can also take the money as a lump sum anytime they choose.
Critics are also making a fuss about the fact that insurers apparently fail to give beneficiaries sufficient notice that the accounts are not insured by the Federal Deposit Insurance Corp.
That last assertion is itself fraudulent, since it ignores that life insurance policies are backed by state insurance guarantee funds, financed by insurers.
And to say that insurers are swindling people by paying them less than the insurers themselves make on those funds is preposterous. If that is fraud, then my bank is cheating me with every measly interest payment they credit to my savings account.
Certainly, beneficiaries need to be informed of their right to take all the proceeds up front and invest or spend it as they wish. But I think that insurers probably do help many grieving families by holding these funds until beneficiaries can make a clear-headed decision about what’s in their best interest.
Insurers are obviously obliged to spell out clearly what the alternatives are to beneficiaries, including the lump-sum option. And I trust they do train all their personnel who deal with anguished survivors to be as forthcoming as possible about the options.
The RAA working group of the National Association of Insurance Commissioners began meeting recently on this question. Let’s hope it comes up with some sane, well reasoned suggestions on handling the issue.
RAAs assist grieving survivors at a time when what to do with their loved ones’ insurance proceeds is the least of their troubles. Critics can express outrage, but to call the practice “unacceptable” as a White House spokesman was quoted as saying, is overdone.
RAAs are self-serving for insurers, but they are hardly abusive. As the mortgage and banking crises have shown, there are far too many financial abuses in our great nation. But surely, RAAs are not among them.