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.
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“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.