Spurred by media reports alleging deception by some life insurers in their use of retained asset accounts[1] for disbursing death benefits to the beneficiaries of fallen United States military personnel and the apparent lack of oversight by federal and state regulators, New York Attorney General, and gubernatorial hopeful, Andrew Cuomo has issued subpoenas to leading life insurers regarding their alleged “reaping [of] hundreds of millions in secret profits while misleading families into putting benefits into insurer controlled, low yield, potentially risky accounts.”

Attorney General Cuomo’s Investigation

Attorney General Cuomo has stated that it is “shocking and plain wrong for these multi-national life insurance companies to pocket hundreds of millions in profits that really belong to those who have lost family members and have already suffered immensely.”  The Attorney General’s statement alleges that insurers reportedly earn upwards of 4.8% on the funds held in retained asset accounts, but pay surviving family members as little as 0.5% interest, “less than half the rate available at some Federal Deposit Insurance Corporation (the “FDIC”) insured banks.”[2]

Further, according to the Attorney General Cuomo, life insurers are not adequately informing beneficiaries “of the details of these accounts including the fact that the insurers are making huge profits at the expense of the grieving family.”  According to the Attorney General’s statement, “insurers do not put the cash owed to families in banks insured by the FDIC, but instead in the insurer’s corporate account [where they] may be subject to the insurer’s creditors.”

The subpoenas request a wide-range items, “including but not limited to the production of information relating to how and when beneficiaries are informed of the terms and conditions relating to the retained-asset accounts, as well as data relating to the difference between interest earned by the insurance companies and interest earned by the beneficiaries.”

While one of the two insurers subpoenaed administers the Servicemembers’ Group Life Insurance program and the other runs the group life program for federal civilian employees, Attorney General Cuomo has stated that “entire life insurance industry is under investigation for the practice.”

Connecticut

Connecticut Attorney General, and senate hopeful, Richard Blumenthal has urged regulatory action by the Connecticut Insurance Department Commissioner Thomas Sullivan to “stop misleading and deceptive practices by life insurance providers that may have deprived families — including military families — of potential benefit income.”

Attorney General Blumenthal sent a letter to Commissioner Sullivan stating that life insurers appear to be “failing to make prompt full payment to beneficiaries on life insurance policies upon the death of the insured party.”  The Attorney General’s letter points out that the retained asset account “checkbooks” are not bank checks nor are the “funds being held in a federally insured depository, as a consumer would expect.”  Further, the letter alleges that “If consumers clearly understood that these funds were being held in uninsured accounts, and that consumers were almost certainly receiving lower interest rates than they could receive in federally insured bank accounts, no rational consumers would accept this arrangement.”  The letter’s argument then proceeds with the conclusion that “it seems obvious that beneficiaries are not receiving adequate disclosure to make sound decisions.”

While not committing to any legal action, Attorney General Blumenthal offered his support to Commissioner Sullivan to “attack[ ] and remedy[ ] this unconscionable practice” by either initiating regulatory action to bar the use of retained asset accounts or lobbying for legislation that would do the same.

Industry Response

In response, the American Council of Life Insurers (the “ACLI”) has come out in support of life insurers’ use of retained asset accounts as a way to provide “a significant benefit to family members who are dealing with the emotional loss of a loved one.”  Further, the ACLI contends that the retained asset accounts are secure as they are regulated and backed by the full strength and claims-paying ability of the life insurer.  The National Association of Insurance Commissioners (the “NAIC”) has stated that the “accounts were initially created at the request of consumers to provide options for receiving benefits from a life insurance policy, and with proper disclosure, consumers have generally been happy with this flexibility.”  The NAIC also announced that it will be “re-reviewing [its model] disclosure requirements associated with [retained asset accounts] and is developing a consumer alert to help policyholders better understand the terms of these kinds of settlements.”

Other Responses

The Department of Veteran Affairs has announced that it is conducting a full investigation into the use of retained asset accounts.  According to media sources, Defense Secretary Robert Gates has also pledged the Pentagon’s support with the probe.

United States House Representative Bob Filner (D-Calif.), chairman of the House Veterans Affairs’ Committee, has stated that he is not pleased with the news that life insurers are profiting from deaths of service men and women at the expense of their beneficiaries.  An investigation or hearings by the House Veterans Affairs’ Committee regarding the use of retained asset accounts for the Servicemembers’ Group Life Insurance program is expected.

We will continue to monitor developments relating to the use of retained asset accounts here at InsureReinsure.


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[1] Under many state insurance laws, an insurer must offer a beneficiary a lump-sum payment option consisting of the full amount of the life insurance proceeds in accordance with the terms of the life insurance contract.  Insurers are also allowed to offer other benefit payment options as well such as a retained asset account.  A retained asset account is designed to be a temporary repository of funds while the beneficiary considers the available options.

Beneficiaries are provided a check book, from which they can access the life insurance proceeds, even doing so with one check for the entire amount.  Some insurers provide beneficiaries with a checking account, while other provide a draft account.  These accounts accrue interest.  Periodic account statements are provided to the beneficiary.

As with the beneficiaries of civilians, retained asset accounts are provided to the beneficiaries of fallen soldiers under the Servicemembers’ Group Life Insurance program.

[2] Opponents cited in the recent media reports point to the large spread between the relatively high returns enjoyed by life insurers on cash held in retained asset accounts and the low interest rates paid to the beneficiaries.  They state this is unfair given the retained asset accounts are typically not insured by the FDIC, which insures deposit accounts up to $250,000.  Critics also allege that these facts are not properly disclosed to beneficiaries and that the death benefits are typically held in the insurer’s general fund rather than disbursed to the beneficiaries or a third-party intermediary, such as a FDIC-insured bank.

Further, the media reports highlight statements made by various state insurance regulators that retained asset accounts are FDIC insured, pointing to a lack of understanding by those charged with protecting the interests of insureds and beneficiaries.  The media reports also include information gleaned from a representative from the Department of Veteran Affairs who wrongly declared that the funds in retained asset account went into a bank, not the insurance company’s general fund, and that no profit is generated from those accounts.