Insurance Regulators Battle Consumer Concerns Regarding Life Insurance Benefits

Insurance regulators at the state level, with concerns to improve the disclosure of payment options among insurance plans with death-benefits, issued an alert to consumers regarding the insurance industry standards of retaining funds rather than paying them outright in a lump sum.

“You may be able to earn a higher rate of interest on the life insurance proceeds if you select a different payout option,” the National Association of Insurance Commissioners said in accordance with the alert. “While the documents you receive might look like a checkbook, it might actually be drafts, which are similar to checks, but different in some ways.”

The consumer alert was revealed after a NAIC panel meeting Monday in Seattle which reviewed retained-asset accounts. Insurance regulators established the panel after Bloomberg Markets reported that insurance providers profit by retaining and investing roughly $28 billion owed to 1 million beneficiaries.

“Disclosure is paramount,” said co-chair of the panel, Thomas R. Sullivan. “That seems to be the central issue.”

These retained-asset accounts allow insurance companies to keep proceeds of life insurance policies in their general corporate accounts, earning income on investment, while providing the beneficiary with an account similar to checkbook which offers no insurance by the Federal Deposit Insurance Corp. The NAIC heard testimony from Peter Gallanis of the National Organization of Life & Health Insurance Guaranty Associations that the accounts of issue are covered solely by state insurance regulators. While beneficiaries are able to draw drafts on the account's funds, they do not always clear as easily as checks.

Within the consumer alert, the NAIC made suggestions to consumers to evaluate alternatives to keeping benefits in an interest-bearing account. The alert also emphasized consumers to inquire about what type of interest rate they will receive, what potential charges that may be administered, and what will guarantee funds if the provider fails. Some policyholders went as far as consulting with a bad faith insurance lawyer for additional insights.

Sheila Bair, FDIC Chairman, voiced “serious concerns” in an Aug. 5 letter to the NAIC that consumers may be under the impression that the accounts are insured by the FDIC. New York Attorney General Andrew Cuomo has initiated a fraud probe and subpoenaed insurance companies including MetLife Inc. and Prudential Financial Inc.

The emergence of retained-asset accounts necessitates enhanced disclosure about the products, said Peter Kochenburger, a University of Connecticut law professor and NAIC-appointed consumer advocate. “The last NAIC bulletin is 16 years old. It’s very general.” The ambiguity regarding the accounts has prompted investigation among many experts involved in the industry, ranging from the typical insurance lawyer to government officials.

According to Kentucky State Representative Robert Damron, president of the National Conference of Insurance Legislators, only six states have administered explicit consumer protections on retained-asset accounts.

Damron is promoting that states pass what he calls a beneficiary’s bill of rights, making insurance providers use only retained-asset accounts for consumers who ask for them. Insurers would also be required to disclose how interest rates and fees are factored, in addition to how funds are invested - an issue that is raising the eyebrows of many bad faith insurance lawyers.

“Allowing the life insurance companies to default to retained-asset accounts is just not acceptable,” said Damron after Monday's meeting. “How any consumer advocate, which is what an insurance commissioner is supposed to be, could allow a default to an RAA raises serious concerns in my mind about who is protecting who.”

MetLife and Newark representatives, among the two largest U.S. life insurance providers, expressed to the NAIC panel that they offer sufficient disclosure to consumers explaining retained-asset accounts and give policyholders the option of a lump-sum payment.

Disclosures about these types of accounts “have evolved over the years,” said Bernard Winograd, executive vice president and chief operating officer of Prudential’s U.S.-based businesses. “It’s a balancing act between legal requirements and what the consumer can understand.”

It's the difference between what is required in the policy and how aware the customer is about the benefits and the corresponding requirements, a disclosed insurance defense lawyer said after Monday's meeting.

Many insurance consumers select retained-asset accounts, which offer safety and time to grieve, he said. “Checks have a tendency to get lost” and obtaining a significant lump-sum payment can leave beneficiaries feeling “subject to predators,” he mentioned. “My only worry is we go back to a system where we force checks on people not prepared to accept them.”

Documents regarding MetLife’s "Total Control Account" are “thorough, clear and easy to understand,” battled Todd Katz, executive vice president of U.S. business at the New York-based insurer. The accounts make a payment of a minimum guaranteed interest rate at 3 percent, 1.5 percent or 0.5 percent, depending on when they were opened, he said. 

U.S. Insurance Regulators Issue Consumer Alert on Death Benefits

Bloomberg

FDIC Chairman Sheila Bair voiced “serious concerns” that consumers may mistakenly think the accounts are insured by the FDIC in an Aug. 5 letter to the NAIC. 

Photographer: Andrew Harrer/Bloomberg

 

 

State insurance regulators, under pressure to improve disclosure of death-benefit payment options, issued a consumer alert about the industry practice of retaining funds rather than paying them in a lump sum.

“You may be able to earn a higher rate of interest on the life insurance proceeds if you select a different payout option,” the National Association of Insurance Commissioners said in the alert. “While the documents you receive might look like a checkbook, it might actually be drafts, which are similar to checks, but different in some ways.”

The alert was issued after an NAIC panel met yesterday in Seattle to review retained-asset accounts. The regulators created the panel after Bloomberg Markets magazine reported in July that insurers profit by holding and investing $28 billion owed to 1 million beneficiaries.

“Disclosure is paramount,” said Thomas R. Sullivan, co- chair of the working group, at its first meeting yesterday. “That seems to be the central issue.”

Retained-asset accounts let insurers keep proceeds of a life insurance policy in their general corporate accounts, earning investment income, while providing the beneficiary with a checkbook-like account that’s not insured by the Federal Deposit Insurance Corp. The NAIC heard testimony from Peter Gallanis of the National Organization of Life & Health Insurance Guaranty Associations that the accounts are covered by state insurance backstops. While beneficiaries can draw drafts on the funds, they don’t always clear as easily as checks.

‘Serious Concerns’

In its alert, the NAIC suggested consumers consider options besides keeping benefits in an interest-bearing account at the insurer. It also urged consumers to ask what interest rate they will get, what fees may be charged and what will guarantee funds if the insurer fails.

Improving disclosure is a better way to protect consumers than passing new laws, said Sullivan, Connecticut’s insurance commissioner.

FDIC Chairman Sheila Bair voiced “serious concerns” that consumers may mistakenly think the accounts are insured by the FDIC in an Aug. 5 letter to the NAIC. New York Attorney General Andrew Cuomo has opened a fraud probe and subpoenaed insurers including MetLife Inc. and Prudential Financial Inc.

The growth of retained-asset accounts necessitates improved disclosure about the products, said Peter Kochenburger, a University of Connecticut law professor and NAIC-appointed consumer advocate who spoke before the working group. “The last NAIC bulletin is 16 years old. It’s very general.”

Bill of Rights

Only six states have issued clear consumer protections on retained-asset accounts, according to Kentucky State Representative Robert Damron, president of the National Conference of Insurance Legislators.

He is urging states to pass what he calls a beneficiary’s bill of rights requiring that insurers only use retained-asset accounts for consumers who request them. Firms would also be forced to disclose how interest rates are determined, how funds are invested and any service fees.

“Allowing the life insurance companies to default to retained-asset accounts is just not acceptable,” said Damron after yesterday’s meeting. “How any consumer advocate, which is what an insurance commissioner is supposed to be, could allow a default to an RAA raises serious concerns in my mind about who is protecting who.”

Representatives of MetLife and Newark, New Jersey-based Prudential, the two largest U.S. life insurers, told the NAIC panel they provide ample disclosure to consumers explaining retained-asset accounts and give policyholders and beneficiaries the choice of a lump-sum payment. About 60 percent of customers close out their accounts within a year, the officials said.

‘Balancing Act’

Disclosures about retained-asset accounts “have evolved over the years,” said Bernard Winograd, executive vice president and chief operating officer of Prudential’s U.S.-based businesses. “It’s a balancing act between legal requirements and what the consumer can understand.”

Many customers choose the accounts, which offer safety and time to grieve, he said. “Checks have a tendency to get lost” and receiving a large lump-sum payment can leave beneficiaries “subject to predators,” he said. “My only worry is we go back to a system where we force checks on people not prepared to accept them.”

MetLife’s disclosure documents for its so-called Total Control Account are “thorough, clear and easy to understand,” said Todd Katz, executive vice president of U.S. business at the New York-based insurer.

The accounts pay a minimum guaranteed interest rate of 3 percent, 1.5 percent or 0.5 percent, depending on when they were opened, he said. MetLife has 485,000 retained-asset accounts. “In today’s interest-rate environment, we believe this is an exceptional consumer value,” Katz said.

“To be sure, TCA accounts are also good for MetLife,” which aims to grow assets, he said. “Nothing here is secret. We do make a profit on TCA.”