California Enacts Life Insurance Death Benefit Law
California enacted a death-benefit law this week that will place new requirements on life insurance companies. In response to complaints that insurers routinely failed to contact or pay death settlements after policyholders died, the government has moved to increase protections for beneficiaries.
Life Insurers Accused of Storing Death Benefits
Over the past year, California state officials have looked into the activity of life insurance companies after discovering that many were failing to alert beneficiaries of settlement payouts owedâ€”and in some cases, even choosing not to attempt to find them.
Instead, the companies were storing death benefits in so-called retained asset accounts (RAAs) that accrued interest over time.
Companies in California were required to either pay beneficiaries within a three-year period or turn the funds over to the state’s comptroller’s office. However, Insurance Commissioner Dave Jones determine that companies were doing neither, resulting in an investigation of 10 top insurers.
RAAs Only Permitted with Beneficiary Consent
According to the new California law that took effect on Jan. 1, insurers will no longer be able to store funds in RAAs without first receiving permission. Beneficiaries will have to provide companies with written declarations stating that they would like to have their settlements directed to in-house accounts, rather than receiving lump sum payments.
According to a 2010 Bloomberg Markets report, insurance carriers have profited by holding and investing $28 billion that was actually owed to beneficiaries. The government found that companies were make little or no attempt to locate survivors, even with numerous resources at their disposal.
The U.S. Government Accountability Office noted, “When consumers have the option to choose between RAAs and lump-sum check payments, the overwhelming majority choose lump-sum check payments.” Since so many beneficiaries prefer the full payout, the new death-benefit law is expected to significantly impact one of insurers’ major profit sources.