Recently, articles on WSJ and Bloomberg have reported that insurance companies are putting beneficiaries’ death benefits into interest-bearing checking accounts instead of paying out the life insurance proceed – and they’re giving the industry another unmerited black eye.
But when unwarranted attacks like these occur, instead of becoming defensive, we should see them as a signal for us to do a better job communicating our practices.
We work in a complicated industry with complex transactions and products that require experts, such as yourself, to interpret the products for consumers. It’s true that many companies automatically put life insurance proceeds in an interest-bearing checking account, but if the beneficiaries select a check for the proceeds, it is paid out as soon as the paperwork is processed and approved, sometimes in a matter of days. In fact, most beneficiaries request lump-sum payouts. According to Genworth, about 90 percent of their beneficiaries choose this option.
Those who don’t request a lump-sum payout are often individuals who need time after a death of a loved one before they can begin thinking about how they will manage the proceeds. For this reason, they choose to leave it in an automatic life insurance proceeds account, where the funds remain liquid and available to them when they are ready to make sound financial decisions.
To the best of my knowledge, no beneficiaries have lost their proceeds when they were held in an insurance company checking account because of financial mismanagement. In addition, these dollars are secure and guaranteed by the state life and health insurance guaranty associations.
Most beneficiaries, if they take the life insurance proceeds in a lump-sum check, will deposit them into a checking, money market, savings account, or CD, which earns very little interest at today’s rates. Beneficiaries who leave the money in an insurance company’s automatic settlement account can take the money out at any time by writing a check, no strings attached: no surrender charges and no fees.
The news stories also criticized insurance companies for pocketing some of the interest earned on these automatic savings accounts. Again, this is an important area where we should be doing a better job communicating our practices. Insurance companies put your life insurance proceeds to work, no differently than banks or other financial institutions that manage money. It could just sit there, but then we would be negligent when that money could be making more money. To keep this money-earning cycle going, some of those earned dollars need to be put back into the insurance companies to feed the engine. But in the end, the beneficiary hasn’t had to spend one dime, or pay one fee, or any other charges to earn interest on their dollars. That’s not a bad deal, and probably a better one then they would get from any other financial institution.
How do we do a better job communicating all this to consumers? We take note of the areas where our industry has been criticized for its practices and use this information as an opportunity to simply and clearly explain them to our clients. It’s our job as insurance agents to help them understand their options and the pros and cons of each choice. That’s what builds trust – and trust is the key to strengthening our industry’s image.
Marvin H. Feldman is the president and chief executive officer of the LIFE Foundation. He can be reached at [email protected].