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Double Trouble for Retained Asset Accounts

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California has enacted into law two bills tightening consumer protections on retained asset accounts—one of which repeals current law, which state regulators say allows insurers to require beneficiaries to receive their life insurance proceeds only through an RAA.

This law, S.B. 599, requires life insurers to obtain a beneficiary’s written declaration as to how he or she wants to receive a benefit payment.

CA Governor Jerry BrownGov. Jerry Brown signed the bill into law Oct. 2. It passed the legislature Sept. 1.

State Insurance Commissioner Dave Jones said he asked the state legislature to pass the law because while RAAs appear similar to a checking account, they have certain features that can make it difficult for a beneficiary to access the funds and RAAs are not protected by federal deposit insurance.

Although RAAs resemble checking accounts, retailers will not readily accept RAA drafts, and some RAAs have minimum draft requirements, Jones said.

S.B. 599 requires an insurer to try to get a written declaration from the beneficiary prior to depositing claims money into a retained asset account.

But, if a consumer failed to make a decision, the bill would let an insurer set up an RAA if the declaration form clearly disclosed that the default benefits payment mechanism was an RAA.

The bill also would require insurers to provide beneficiaries with RAA-related disclosures so that beneficiaries would have the information needed to make informed decisions about the RAA option.

Jones said he supported S.B. 599 because “insurance companies invest the funds in the RAA and draw interest, only a portion of which is paid to the beneficiary, so beneficiaries are deprived of earning the fullest investment return on the benefits.”

The second bill, S. 713, requires insurers to make specific disclosures to beneficiaries of life insurance policies regarding RAAs before the funds are placed in RAAs. It was signed by Gov. Brown on July 26. It passed the legislature July 11.

This law is based on the NAIC model bulletin drafted last year. It would require insurers to disclose various important facts and features relating to RAAs, such as how a beneficiary may access the entire account amount, interest rate information, how the account funds are guaranteed, and how beneficiaries can learn about their guaranteed limits of coverage.

It also requires that if a beneficiary chooses to receive their benefits through an RAA, the bill requires insurers to issue a supplemental contract detailing beneficiaries’ rights and the insurer’s obligations relating to these accounts.

John Bell, a partner at Bell & Brigham, Augusta, Ga.—a plaintiff’s lawyer who has filed several lawsuits alleging that placing the proceeds of group life insurance polices regulated under ERISA is, in fact, fraud—said in response to passage of the bills that while the laws are an improvement, stronger consumer protections are needed.

He said many states have laws imposing penalties for delaying payment of the proceeds of life insurance policies. But, he said, insurers in some cases place death benefits in RAAs in order to satisfy state laws dealing with prompt payment mandates while still retaining control of the funds.

“Insurers deem the policy ‘paid’ to satisfy state law, but still retain the funds,” Bell said.

“The California laws should be more specific by stating that placing the proceeds of life insurance policies in an RAA constitutes an unpaid claim,” he said.

Jones said the issue first came to his attention when military families complained that they had not been asked for permission before the life insurance benefits of loved ones who died in military service were put into a retained asset account by life insurers.

The issue generated great controversy last year when Bloomberg News published a series of stories dealing with complaints by military families that the funds were inappropriately being placed in RAAs and that insurers were earning money on the spread between the amount they earned by investing the money and the amount of interest they paid to the beneficiary.

Suits were filed by beneficiaries, several in Massachusetts federal courts, last year over the issue, and both the Veterans Administration and the Defense Department are looking into the issue.

In a statement, Jones said, “Now military families as well as all Californians will be able to decide for themselves how they want their life insurance benefits to be paid by requiring insurers to get their permission before putting their benefits into a retained asset account controlled by the insurer.”

Both laws go into effect Jan. 1, 2012.