I put retained asset accounts in the category of “no good deed goes unpunished.”
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Last week the life insurance industry found itself facing a rising chorus of criticism about a common way of paying death benefits to the beneficiaries of life insurance policies. Instead of giving the beneficiaries a check for the entire amount, many companies retain the money and provide a booklet of drafts — resembling a checkbook — that allows the beneficiaries to make withdrawals as they wish. The money is held in “retained asset accounts,” which are really just part of each insurer’s general account.
This payment method arose in the mid-1980s. It was intended to be a win-win: beneficiaries would not have to worry about investing a large amount of money at a time of emotional turmoil, and insurers could make an investing profit and maintain a relationship with the beneficiaries.
Here are the criticisms (so far), and my reactions:
- Insurers don’t always tell you that you can take your money in a lump sum. Okay, shame on them. They should certainly make it clear that you have the option to close the retained asset account as soon as you get it.
- The retained asset accounts do not have FDIC protection. True. If you’re afraid that the insurance company will not be able to pay you, write a draft for the full amount and deposit it in your FDIC-insured bank account. If the amount is more than $250,000, use several banks.
- The insurance company may be paying you a lower interest rate than you could get elsewhere. Look at the rate that the insurance company is paying you, and look at what you could get elsewhere. If you can get more elsewhere, move the money from the retained asset account to the other place.
- The insurance company is making a big profit at your expense, because they are paying you much less than they are earning. This depends on how you do the accounting. The insurer’s general account contains many different investments — primarily bonds and mortgages — with a range of maturities. The retained asset account is available on demand. What investments is the insurer matching against the retained asset account? If you look at the yield on the insurer’s short-term investments, the interest spread will be small. If you look at the yield on the insurer’s entire general account, the interest spread will be large. Is it appropriate to match a short-term liability against long-term investments that have interest-rate and credit risk?
- The money in the retained asset accounts is subject to each state’s abandoned property laws. True, I guess, and also true for other accounts.
When this storm passes, perhaps we can move on to the insurance industry’s bad deeds that go unpunished. I cannot list them here, due to the limited size of the Internet.