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Soldier’s story triggers outrage

By Jay MacDonald ·
Friday, August 20, 2010
Posted: 7 am ET

It’s not often that a standard life insurance practice triggers national outrage, given that life insurance is perhaps the most conservative and least controversial of all insurance products.

But fireworks were indeed sparked by a recent Bloomberg story about a mother’s fury at the terms of her son’s $400,000 Prudential life insurance policy after the 24-year-old Army sergeant was killed in Afghanistan.

The bereaved mother received a checkbook from Prudential that gave her access to the benefits, which were stored in what is called a retained asset account with the insurance company. She was shocked to learn that the funds were not FDIC insured and that Prudential retains a portion of the account’s investment earnings.

The article goes on to quote critics of retained asset accounts, who call the practice institutionalized bad faith at best, a scheme to defraud consumers at worst. Within hours, the Department of Veterans Affairs and New York attorney general Andrew Cuomo launched investigations. U.S. Rep. Debbie Halvorson (D-IL) even introduced a bill in Congress to regulate the practice.  

The insurance industry does not take such attacks lightly. This month, the National Association of Insurance Commissioners issued a consumer alert on retained asset accounts and formed a workgroup to review the practice.

Insurance Information Institute senior vice president and chief economist Dr. Steven Weisbart issued a response that expressed the industry’s genuine surprise at being blindsided by the attack on a “life insurance industry practice that has served beneficiaries well for a quarter century and has generated few if any complaints to state insurance departments.”

Weisbart points out that state guaranty laws insure life insurance benefits for $300,000 to $500,000 depending on the state verses the FDIC’s $250,000 limit, that insurance companies are at least as financially sound as banks, and that a bank would charge similar rates on an account with instant liquidity.

Why the checkbook? Weisbart says it’s the default in the absence of any other settlement option, that the terms are clearly presented to consumers, and to simply issue a check for the balance would ignore “the likelihood, based on long insurer experience, that when insurers did that the checks often either went uncashed for long periods of time or were spent/invested unwisely and effectively lost.”

What do you think? Are life insurance companies that use retained asset accounts ripping off consumers? Or are they protecting bereaved family members from making rash financial decisions during their time of grief?

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Jay MacDonald
August 31, 2010 at 10:11 am

I quite agree, Jack. The age of transparency cuts both ways: consumers want full disclosure but when that disclosure runs to dozens of pages of legalese, it sort of defeats the purpose. What I found most interesting about this topic is that many if not most life insurance agents seemed genuinely blindsided at being accused of deceptive practices when they were under the impression that they were providing a caring service to their clients' beneficiaries during a difficult time. Not sure how this practice will resolve itself, but I hope we don't throw the baby out with the bathwater and lose the human touch in the name of transparency.

August 30, 2010 at 8:20 pm

No, they are not ripping them off although these accounts are annoying.

I do think the intent is good but the problem is that the explanation of such accounts are hidden in the claim form and not clearly transparent enough for my liking.