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Life Health > Life Insurance

RAA Laws in California: What’s the Big Deal?

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For a non-issue, the controversy surrounding retained asset accounts has had quite a shelf life.

It got extended again in early October when California enacted into law two bills tightening consumer protections on retained asset accounts.

I’ve said it before and I’ll say it again: Much ado about nothing.

One of the new California laws repeals an existing law allowing insurers to require beneficiaries to receive their life insurance proceeds only through an RAA.

OK. Fine. Let beneficiaries decide they want a lump sum check from the insurance company instead of having proceeds placed into an RAA, from which they could already withdraw the entire amount from Day 1. Certainly, beneficiaries should have that option, even though one full withdrawal from their new RAA nets the same effect.

At its root, this whole issue always seemed more like a misunderstanding to me. People were outraged initially when they were led to believe via a rather one-sided Bloomberg News series of articles last year that greedy, evil insurance companies were bilking families of fallen soldiers who gave their lives for our country. If that were the case, outrage is justified. But actually, in a longstanding, legal business practice, insurance companies earn some interest on funds placed in retained asset accounts when beneficiaries allow the funds to remain there.

What always seemed to be lost in the misplaced outrage was the fact that beneficiaries were never under any obligation whatsoever to keep life insurance policy proceeds in these accounts. But if they did, they would earn some interest (typically higher than the rate paid by a money market or savings account) while the insurer would also make interest. I am not advocating leaving the funds in an RAA indefinitely and trying to use it like a normal checking account. But placing funds in an RAA initially allows a beneficiary a chance to take a step back — often during an emotionally tumultuous time — and assess the best way to make use of the proceeds moving forward, whether the intent is to invest them, spend them, or a combination of both.

The only thing that really needed to happen to ease confusion on the issue was to require insurers to emphasize RAA-related disclosures, so beneficiaries would be aware of what they are and the options they provide — including spelling it out that a beneficiary can, at any time, withdraw all funds from the RAA and do with them whatever they want. I know there are beneficiaries who are unsure about that, who feel intimidated by big insurance companies and can easily be persuaded, I suppose, to leave the funds in an RAA.

One of the new California laws (S. 713) — based on the NAIC model bulletin drafted last year — looks like it should alleviate this confusion, while the other (S.B. 599) requires life insurers to obtain a beneficiary’s written declaration as to how he or she wants to receive a death benefit payment. Both become law on Jan. 1, 2012.

With all the state’s financial problems, I’m surprised California lawmakers had the time or inclination to deal with this issue at all, but they did. Great. Way to go. Now you can move on to real issues.

When I wrote about this issue initially, more than 70 readers commented with their own opinions. I’d love to hear your thoughts again, via the comment box below.


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