The Life Insurance Retained Asset Account Investigation

In August 2010, New York Attorney General Andrew Cuomo subpoenaed multiple insurance companies under the suspicion that they were using what are known as life insurance retained asset accounts to increase their profits at the expense of beneficiaries.

Instead of paying out benefits in lump sums, recipients were advised to keep their money in these accounts with access via a checkbook so the companies could continue to draw interest.

Cuomo called in a number of life insurance companies to take a closer look at the process by which they were handling these accounts. In the meantime, confusing information surfaced regarding how they are insured and otherwise protected. With tons of media coverage circulating, it’s time to take a closer look at the investigation of life insurance retained asset accounts.

What Are Retained-Asset Accounts?

A retained asset account (RAA) is a temporary repository of funds meant to give the beneficiary of a life insurance policy time to consider all of the financial options available to them (lump sum, life income, interest income, etc.).

While these accounts are not meant to be used as the official payout option, until a choice is made, the beneficiary is allowed to access all funds via drafts that resemble a “checkbook.”

However, during the time the money sits in an RAA, it earns interest. This has allegedly enticed many life insurance companies to convince beneficiaries to leave their money in these accounts permanently.

Beneficiaries Owed Money–Accounts Not FDIC Insured

While it’s okay for money to sit in RAAs and collect interest during the waiting period, Cuomo determined that funds were being unfairly held by companies without explaining to beneficiaries what other options were available.

To satisfy his suspicions, he subpoenaed MetLife Inc. and Prudential Financial Inc. to review their records. Not long after, he subpoenaed more life insurance companies, including Genworth Financial Inc., Unum Group, Guardian Life Insurance, New York Life Insurance Co. and Northwestern Mutual Life Insurance.

After just a few days of investigation, Cuomo discovered these insurance companies owed $28 billion in life insurance losses to over 1 million beneficiaries. Shortly thereafter, the National Association of Insurance Commissioners (NAIC) issued a consumer alert warning beneficiaries about payouts and the risk involved in holding money in RAAs.

Further, the FDIC announced that despite the fact many beneficiaries assume their accounts are federally protected in the event an insurance provider suffers a financial loss, RAAs are not insured by the agency. Instead, they are covered by a guaranty that differs from state to state.

The Additional Risk of RAAs

Recently, it was revealed that there are even more problems associated with storing money in RAAs. One of the biggest is that the “checkbooks,” or drafts, that beneficiaries are issued can easily be forged.

Jasmine Williams had this problem after her mother died and she was issued $101,819 held in an RAA in 2002. To gain access to the funds in the account, she was sent a guaranteed money market “checkbook.” Unfortunately, her cousin withdrew $48,900 by forging Williams’ name on 12 checks.

Her insurer, MetLife Inc., refused to cover the losses, citing it was not their responsibility. This story was a grim reminder that if her money had been in a bank, signatures could have been verified and losses covered.

The Need for Federal Oversight

Williams’ story is one the government doesn’t want repeated, which is why the investigation is still underway. Cuomo wants to determine the problems with these accounts and look at how they should be regulated since currently, there are only six states with regulations pertaining to RAAs and none that require insurers to reveal how much interest income they accrue from funds held.

Until the details are sorted out, if you are due money as a beneficiary, it’s good to explore more secure options in regards to your payout. While RAAs may be a good short-term choice, with all of the risks involved, it doesn’t seem that these accounts are the best way to ensure your money is fully protected.