While dealing with the death of a loved one, it can be overwhelming to handle the financial aspects. Retained Asset Accounts (RAAs) are a form of death benefits that can allow you time to get your bearings before addressing your options for the disposition of the payout. Instead of receiving a lump-sum payment, you are provided with a “checkbook” that allows access to the funds.
However, there is a disturbing and misleading side to RAAs. While beneficiaries are notified that the money is held in an interest-bearing account, that money is often held not in a bank where it can receive FDIC protection, but is held in the general account of the insurance companies instead.
Insurers look at this as a win-win situation, claiming that RAAs provide a service in allowing the bereaved time to make the best long-term financial decision while providing both the beneficiary and the insurance company with income. They also correctly point out that a recipient of an RAA can immediately withdraw the entire amount and place it wherever they want as early as they want.
This glosses over some questionable insurance company practices that have been reported, such as:
- Limiting Choice – Some insurance companies make an RAA the only option for the death benefit instead of offering it as a choice. State insurance regulators are beginning to address this by trying to force insurance companies to receive written declarations from beneficiaries on the payout method, make lump sum payments the default option, and/or verify that the payout options are reasonably explained.
- Returns and Risk – Insurers are taking advantage of the higher return of riskier investments compared to lower risk FDIC-insured accounts. They often make larger returns on the account through their investments and pay smaller interest rates to the beneficiaries – pocketing the difference and making a tidy profit on the beneficiaries’ money.
There’s nothing inherently wrong with that, as long as you provide consent and fully understand the options you have — along with the very small credit risk associated with a possible default by the insurance company during the term of the RAA. However, many beneficiaries do not understand that they may be able to acquire a better rate with a simple savings or checking account while retaining FDIC coverage.
With the insurance company holding the funds, you are covered by state guaranty funds. The level of coverage is similar, $250,000 for FDIC and a typical $300,000 for state guaranty funds – but you have the option of splitting a larger amount into multiple bank accounts of less than $250,000. With insurance holdings, your state guaranty limit is the best you can do if the insurance company goes belly up.
- Access to Funds – The checkbooks do not usually contain checks; they contain drafts – in essence, IOU’s. The checks/drafts may be issued in a bank’s name, but money has to be transferred from the insurer to the bank first, requiring the insurer’s permission. Effectively, this makes them useful only at banks and credit unions, as retailers typically reject them. Their true purpose is to allow you to disperse the fund to whatever accounts or investments you eventually want the money to reside in.
Again, there is nothing inherently wrong with this, but most people are naturally going to assume that something that looks like a check acts like a check – especially in such a stressful time.
While various state regulators and legal actions attempt to clarify and control insurance companies’ use of RAAs, your best defense is to understand fully your options. If an insurer offers or requires that you take death benefits as an RAA, be prepared. A great list of questions to ask is available at http://www.naic.org/documents/consumer_alert_raa.htm. You should also check with your state’s insurance commission for any state regulations that may apply.
Finally, should you decide to take the RAA, check rates for competing investments at the earliest opportunity. You can often find a better return on your money, so why leave it in the RAA?