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New York Curtails the Use of Retained Asset Accounts

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New York State has become the first state to require life insurers to pay beneficiaries of life insurance claims immediately, effectively prohibiting the use of retained asset accounts.

Under a circular letter issued today, insurers doing business in the state said that funds should not be held in so-called retained asset accounts, “unless the purchaser of the policy or the beneficiary specifically asks to receive the money in another form.”

The circular letter says that when a life insurance policy requires the lump sum payment of death proceeds, the insurer should send the beneficiary a single check, the state Department of Financial Services said.

When insurers provide options, they should not send a retained asset account unless the beneficiary specifically selects that option, the circular says.

“Beneficiaries who make no selection should receive a single check for the total amount,” the letter said.

The DFS said that the letter also describes the detailed information that insurers should disclose in a clear and conspicuous manner, so that beneficiaries are fully informed about retained asset accounts before they elect how benefits will be paid.

“For example, the insurer should clearly list all possible options for receiving the funds, and should make a single check for the total proceeds one of the options,” the circular says. A circular is a legal directive to an insurer in New York.

“And even where a consumer opts for a retained asset account, the insurer should make clear that at any time, the beneficiary can receive the full amount of the benefit by simply writing a draft for that amount, or for the remaining balance,” the circular says.

The decision was prompted by an investigation first launched by then Attorney General Andrew Cuomo in August 2010.

The DFS said that its investigation found that many insurers make retained asset accounts the default option. 

In those instances, beneficiaries receive retained asset accounts unless the beneficiary specifically asks for immediate full payment or some other option.

“As a result, many people receive these accounts automatically, without a full understanding of how they operate,” according to Benjamin M. Lawsky, DFS superintendent.

“Oftentimes, the accounts pay the beneficiaries a much smaller interest rate than the insurers can earn by investing the funds that they retain until paid to the beneficiary,” Lawsky said.

But, Phillip Stano, a partner in the insurance practice at Sutherland, Asbill & Brennan in Washington, D.C., and who is following the issue on behalf of the firm, disagreed.

“Retained asset accounts have numerous advantages over single checks paid to beneficiaries. RAAs oftentimes constitute faster access to policy proceeds, earn interest from day one, are safe, and provide greater flexibility in usage,” Stano said.

“At the end of the day, many single checks sent to beneficiaries are placed into accounts similar to RAAs that do not pay as high a rate of interest,” Stano added.

Cuomo subpoenaed the records of Prudential, which runs the Servicemembers’ Group Life Insurance (SGLI) program, which was automatically depositing the proceeds of life insurance policies due the survivors of military personnel, in retained asset accounts.

Prudential, through its exclusive contract, provides life insurance to approximately six million U.S. military personnel, their immediate families and veterans.

MetLife was also subpoenaed because it runs the group life program for approximately four million federal civilian employees.

According to a Government Accountability Office study, MetLife earned $267 million on $12 billion in retained asset accounts in 2010. There are approximately four million federal employees.

Robert DeFillippo, chief spokesman for Prudential, said that the company had no comment because it had not yet seen this new provision.

Congressional hearings were held on the issue in 2010, and the Veterans Benefit Administration of the federal Department of Veterans’ Affairs launched a probe of a policy it had approved in 1999 to allow Pru to automatically retain the funds in retained asset accounts and reversed it in September 2010.

In his statement, Lawsky said specifically that, “New York is the first state in the country to institute this tough pro-consumer policy, which makes a full payment to survivors the new standard unless individuals expressly choose the option of having a retained asset account.”

He added that, “People buy life insurance to protect their loved ones after death. New York’s new standard ensures that beneficiaries will receive the full amount of life insurance proceeds immediately, unless they expressly choose another option.

“Our soldiers, veterans, and their families, as well as all New Yorkers deserve to get from the life insurance companies exactly what they paid for. The companies should not be padding their profits at the expense of the needs of New Yorkers,” he said.

Lawsky explained that the use of these types of accounts “has a dramatic impact on soldiers, veterans and their families, because Prudential Financial Inc. has an exclusive contract to provide life insurance to millions of our military personnel, their families, and veterans.”

In addition, he said, MetLife, Inc., which like Prudential utilizes these accounts, operates the federal employee life insurance program for millions of federal employees.  

California passed two laws last year at the request of new insurance commissioner Dave Jones tightening consumer protections on retained asset accounts.

One repeals prior law, which state regulators told legislators 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.

It also 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 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.


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