Category Archives: Retained Asset Accounts

Retained asset accounts (RAA) are in the regulatory hot seat, with critics of the vehicles calling on life insurance companies to improve disclosure policies and beef up transparency of the products to clients.

RAAs are interest-bearing accounts used by life insurers to hold death benefits of beneficiaries. Instead of providing a lump-sum payment, beneficiaries are paid via a “checkbook” supplied by the insurer. The checks themselves are draft-account checks, however, and cannot be used as easily as standard bank-account checks.

Bloomberg first reported on the issue of retained asset accounts earlier this summer, bringing to light the fact that RAAs allow insurers to earn high returns – 4.8% – on the proceeds of a life insurance policy. Meanwhile, beneficiaries get peanuts with interest rates as low as 0.5%.

On top of that, retained asset accounts are not insured by the Federal Deposit Insurance Corp. (FDIC).

Advocates of retained asset accounts say the products give beneficiaries additional time to decide what to do with their money.

Recently, retained asset accounts were the focus of subpoenas issued by New York Attorney General Andrew Cuomo to Prudential Financial and MetLife. Now, Cuomo’s office reportedly has expanded the investigation to include other insurers. According to an Aug. 31 article by the Indianapolis Star, one of those insurers is Carmel-based CNO Financial Group, formerly known as Conseco.

Currently, only six states have regulations pertaining to retained asset accounts. However, the regulations don’t mandate that insurers reveal how much interest income they make on the money held for the beneficiary.

In August, the National Association of Insurance Commissioners issued a consumer alert about retained asset accounts.

Retained asset accounts are facing growing scrutiny, with regulators calling into question the disclosure policies of insurance companies that market and sell the products to clients. In July, New York Attorney General Andrew Cuomo opened a fraud investigation into retained asset accounts, with subsequent probes announced by Georgia and New York insurance departments.

Earlier this month, the U.S. Department of Veterans Affairs also announced plans to review its own insurance program, followed by the U.S. House Oversight and Reform Committee saying it would investigate insurance benefits for 6 million U.S. soldiers.

Insurers like MetLife and Prudential Financial use retained asset accounts as a way to keep cash when beneficiaries of the policies do not elect a lump-sum payout of death benefits. Beneficiaries are instead issued a “checkbook” to access their funds. Meanwhile, the insurance companies earn interest from the money in the accounts.

Retained asset accounts are not backed by the Federal Deposit Insurance Corporation, however – a crucial fact that creates uncertainty and added risks. Take the case of Jasmine Williams.

After her mother passed away in 2002, Williams was assured by MetLife that her $101,819 in life insurance benefits were safe. She was then sent a guaranteed money market “checkbook.”

The next year, Williams, who was 19 at the time, told MetLife that a cousin had taken nearly $50,000 by forging her name on 12 checks. Williams sought reimbursement. The insurance company and Pittsburgh-based PNC Bank NA, which processed the MetLife checks, refused to make good on Williams’s losses, however. Each company denied responsibility, according to the Bloomberg, which first reported the story.

If Williams’s money had been in a bank, instead of an account managed by an insurer, federal and state laws would have required the bank to verify signatures on checks and cover losses.

“It’s high risk for the beneficiary to have money in these insurance accounts,” said Robert Hunter, director of insurance for the Consumer Federation of America in Washington, in the Bloomberg article. “I’ve been telling people to get their money out. You have what I consider a little black hole.”

Retained-asset accounts – a product that allows insurers to profit from beneficiary death benefits by placing the funds in interest-bearing accounts – have become the new tainted investment of the day.

Just days after the Federal Deposit Insurance Corporation announced that life insurers should disclose more information about retained-asset accounts to their customers, the National Association of Insurance Commissioners issued a consumer alert on the products.

Last month, New York Attorney General Andrew Cuomo subpoenaed Prudential Financial, MetLife and several other insurers as part of an investigation into possible fraud in the life insurance industry.

The focus of Cuomo’s investigation concerns whether consumers thoroughly understand the payout options associated with retained-asset accounts.

A retained-asset is considered a temporary repository of funds. Instead of paying out a lump-sum upon the death of a policyholder, insurers keep the money in their own general fund. By keeping the money, insurers are able to earn a higher return on the funds than they pay out in interest.

Investigations into retained asset accounts are heating up from regulators and New York Attorney General Andrew M. Cuomo. At issue is how insurance carriers report and maintain the death-benefit proceeds held in the accounts. According to an Aug. 4 story by Investment News, regulators are discussing the possibility of requiring carriers to break out details on the retained-asset accounts on the financial statements that insurers file with state regulators.

“We’re paying close attention to how these accounts are reported through the financial filing process and looking to see if more can be done with their oversight,” said Susan Voss, insurance commissioner of Iowa and president-elect of the National Association of Insurance Commissioners, in the Investment News story.

Insurers use retained asset accounts to keep cash when beneficiaries of the policies do not elect a lump-sum payout of death benefits. However, the accounts themselves aren’t backed by the Federal Deposit Insurance Corp. and may pay uncompetitive interest rates.

“These accounts were invented not to help consumers, but to help insurance companies,” said Bob Hunter, director of insurance for the Consumer Federation of America in Washington, in the Aug. 4 Investment News article. “I can’t think of any reason why you wouldn’t want a lump-sum payout.”

When survivors don’t opt for a lump-sum payment, insurers place the cash belonging to the beneficiaries in the insurers’ corporate accounts. The cash then earns upwards of 4.8% for the insurance companies. Beneficiaries, however, do not exact the same benefits. The insurers pay families as little as 0.5% interest, less than half the rate available at some FDIC-insured banks.

As reported by Aug. 6 by Bloomberg, beneficiaries need to give careful consideration to the interest rates being offered on retained asset accounts and whether that rate is high enough to take on the risk of forgoing FDIC insurance.

Currently, no state keeps track of how much money insurers are holding in retained assets.

Retained asset accounts translate into significant profits for insurance carriers. The accounts allow more than 100 carriers to earn investment income on $28 billion owed to life insurance beneficiaries, according to Bloomberg. At the same time, insurers typically market retained asset accounts as a “service” designed to give beneficiaries the appropriate amount of time to decide what they will eventually do with the funds.

Carriers make money by investing the funds in bonds and pocketing the difference between returns and the interest credited to the accounts.

According to Bloomberg, some 40% of retained asset accounts at insurance companies still have money in them a year later. Some insurance companies issue a “checkbook” to beneficiaries. Because the checks generally mimic actual bank checks, beneficiaries are likely to assume that their money is in bank-insured accounts when in reality it isn’t.

“There needs to be improved disclosure requirements,” said Jane Cline, president of the National Association of Insurance Commissioners, in the Aug. 6 Bloomberg article.

On July 29, New York Attorney General Andrew M. Cuomo launched a fraud investigation into the life insurance industry over practices that he says misled military families and others into putting benefits into insurer-controlled, low yield, potentially risky accounts that reaped millions of secret profits for the insurers.