Retained asset account update – er, “alert”

By Brian Anderson

LifeHealthPro


My financial adviser failed to disclose to me that he was going to be about 10 minutes early for a scheduled meeting about a week ago. Maybe I can get the NAIC to issue a consumer alert about him.

Apparently it’s not that hard. What else could explain the National Association of Insurance Commissioners’ decision to issue a recent “consumer alert” about the longstanding and common practice of insurance companies using retained asset accounts as a way of providing death benefits to beneficiaries?

Now I am typically a fan of the NAIC and the job individual state insurance commissioners do in regulating insurance issues. But this move had me scratching my head a little.

The NAIC, which had its Summer 2010 National Meeting in Seattle Aug. 14-17, hastily pulled together a special task force to convene at the event and deal with the issue. It quite suddenly became a high-profile topic after Bloomberg Markets magazine reported in July that insurers profit by holding and investing roughly $28 billion owed to approximately 1 million beneficiaries in retained asset accounts – including many beneficiaries of military personnel killed in Iraq and Afghanistan. That last part really seemed to catch the attention of certain consumer advocates and politicians.

The NAIC issued its alert immediately after the special task force’s hearing. The curious thing to me is that just prior to the hearing, NAIC President and West Virginia Insurance Commissioner Jane L. Cline said in an article reported by our sister publication National Underwriter that regulators have received “few complaints or questions” about retained asset accounts. So why the consumer alert?

Hopefully, as concerned people have become more educated about the subject since the controversy arose, they now realize that if a beneficiary does not wish to allow the insurance company to hold the proceeds from a death benefit in an RAA, that beneficiary is welcome to withdraw the entire amount immediately. If the beneficiary wants to seek out a higher interest rate on the account than the insurance company offers, or is worried because the funds are not guaranteed by the FDIC, they may withdraw the entire amount immediately, effectively choosing a lump-sum payment option even though the proceeds were originally placed in an RAA.

Consumer advocates and involved politicians seem to be focused now on the issue of disclosure. They don’t think insurance companies provide adequate disclosure about what a RAA is, and they don’t make it clear enough that the accounts are not insured by the FDIC. Certainly it could be made clearer, and that would not be a bad thing. But do we really need to go so far as to remove the retained asset account – a system that has worked for consumers and, yes, insurance companies, too – as an initial default option?

Kentucky State Representative Robert Damron, president of the National Conference of Insurance Legislators, is urging states to pass a beneficiary’s “bill of rights” requiring that insurers only use RAAs for consumers who specifically request them, instead of a RAA being a default option. Insurers would also have to disclose how interest rates for RAAs are determined, how funds are invested and any service fees.

I know there is an underlying good intention in trying to protect consumers, but will this "bill of rights" really help the situation? An RAA is only intended to be used as a holding account until the beneficiary is prepared make a rational decision about what to do with the death benefit. According to an Aug. 15 follow-up article from Bloomberg Markets, representatives from MetLife and Prudential told the NAIC panel during the Seattle meeting that about 60 percent of beneficiaries close out the accounts within a year.

Would it be way off base to assume their might be a big jump in instances of beneficiaries making unsound, rash decisions about what to do with a large, immediate lump-sum payment? Don't you think predators – like those who pray on lottery winners – would relish this new opportunity, and would come out of the woodwork with dubious ways to "invest" the lump-sum proceeds?