Saturday, July 31, 2010

The Retained Asset Account Firestorm

A firestorm ignited this week when Bloomberg Markets magazine reported that over 100 insurance companies earn investment income on $28 billion to life insurance beneficiaries because of a retained asset accounts.

The issue is emotional because it involves two emotional issues: death and money. The emotional fire is being fanned higher because many of the accounts in question are said to be from policyholders of deceased U.S. service men and women at a time when our country is in the midst of wars in Afghanistan and Iraq.

The firestorm deserves and is likely to receive a great deal of scrutiny over the coming weeks. What will tamp out these flames is a commitment to treating deceased policyholders and their beneficiaries with respect which includes honesty; a review to ensure there has been no intentional or unintentional illegal activity; the willingness to restore lost monies if beneficiaries have been illegally harmed or have been misled; and a commitment to strengthening disclosure requirements to future bereaved beneficiaries.

The Story

The story focuses on companies offering beneficiaries retained asset accounts. A retained asset account is an option in which a beneficiary can leave the money with an insurer. The death benefit draws a stated amount of interest and has access to the money in the account. In some cases, there is a check book system in which the beneficiary can draw upon assets.

The issue has New York U.S. Attorney General Andrew Cuomo and the U.S. Department of Veteran Affairs examining the option. In a statement from AG Cuomo’s office, on July 29, he said that his office has served subpoenas on Prudential Financial, Inc., Newark, N.J., and MetLife, Inc., New York.

Bloomberg is reporting that Genworth Financial, Richmond, Va.; Guardian Life Ins. Co. of America, New York; New York Life Ins. Co., New York; and Northwestern Mutual Life Ins. Co., Milwaukee, have confirmed that they have received subpoenas. It is also reporting that an unidentified source familiar with the matter says that Unum Group, Portland, Me.; and a unit of AXA SA, Paris, have also been subpoenaed.

Cuomo’s Response

AG Cuomo is raising several questions about the death benefit option. In a statement, his office says:

“It appears that the substantial interest earned on these accounts mostly benefit and enrich the insurers at the expense of the families to whom the money really belongs. And, beneficiaries are not adequately informed by the insurers of the details of these accounts including the fact that the insurers are making huge profits at the expense of the grieving family.

“Specifically, the insurers place the cash belonging to these families in the insurers’ corporate accounts, reportedly earning the companies upwards of 4.8%. The insurers then pay families as little as 0.5% interest, less than half the rate available at some FDIC insured banks. In short, beneficiaries are unaware that the insurers are reaping enormous, secret profits on these accounts, while the families are losing out on significant potential earnings.

“Furthermore, because insurers do not put the cash owed to families in banks insured by the FDIC, but instead in the insurer's corporate account, these assets may not be safe, are not protected by FDIC rules, and may be subject to the insurer’s creditors.

“Prudential beneficiaries also receive what appears to be a "checkbook," with "checks" bearing the name of JPMorgan Chase & Co. Prudential beneficiaries are not informed by Prudential that these so-called "checks" may not be able to be used to make purchases and are not bank checks at all. Instead, Prudential must send money to JPMorgan Chase before the checks can clear. Prudential beneficiaries are also not informed that under a 2008 law, they have one year to place the death benefits in a Roth IRA and earn tax-free investment gains for the rest of their lives. Thus, real financial harm is suffered by Prudential's lack of disclosure.”

Insurers’ Responses

Prudential released a statement on July 29 in which it states that:

• Beneficiaries are vulnerable targets for abusive sales tactics. We believe that the Alliance Account takes the pressure off beneficiaries to do something with the money—a situation that may lead to imprudent and expensive investment decisions.
o Our program provides a secure, conservative option and access to an independent advisor.
o Beneficiaries who feel confident about making decisions right away have full access to their funds, which may be deposited in the financial institution of their choice, with funds earning interest until presented for payment.
o We do not think it makes sense to force people to make decisions in a difficult and complex financial environment during a very emotional time in their lives.

• Beneficiaries who find a better interest rate can move the money by simply writing a draft.

• Beneficiaries receive the entire amount they are owed plus interest in their account. Prudential does not in any way take money from beneficiaries.

• More than 40,000 Prudential Alliance Account drafts cleared last year. We receive few complaints from beneficiaries about difficulties.

Prudential also states that it fully discloses in its material that its retained asset accounts are not FDIC insured but that the accounts are protected by state guaranty funds that provide “protection of at least $250,000 in most states.”

Bloomberg reports that Met Life’s CEO Robert Henrikson said during an analysts’ call that beneficiaries have access to funds and “our account holders tell us they love it.”

Regulators Speak Out

In response, the National Association of Insurance Commissioners, Kansas City, Mo., held a conference call on July 30 to address the issue. The Insurance Bellwether asked Connecticut Commissioner Thomas Sullivan’s office whether the issue would be addressed at the NAIC summer meeting in Seattle in a week and a half at the Life & Annuities “A” Committee. A spokesperson referred to a statement released by NAIC President, Jane Cline, West Virginia insurance commissioner on July 29.

Cline states that the accounts have been available for two decades and 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. Traditionally, consumers earn interest under these accounts, allowing their benefit to grow without the need to make impulsive decisions about how to manage the benefit.

“The NAIC is re-reviewing the disclosure requirements associated with RAA and is developing a consumer alert to help policyholders better understand the terms of these kinds of settlements. Regulators are also reviewing the transaction
requirements/terms for the "checkbook" usage associated with these types of policies.

“Depending on how an insurance company manages its RAA program, these accounts may not be FDIC insured. However, all states have a life insurance guaranty fund to protect policyholders.

“In addition, all state insurance departments maintain active consumer assistance programs to address consumer complaints, and RAAs have generated few if any complaints. Any consumer who is confused, feels they have been mistreated regarding these types of settlements, or believes there may have been a misrepresentation of the settlement terms should contact their state insurance department.”

At this time, Pennsylvania Commissioner Joel Ario is working through the NAIC framework and to the extent that there are gaps in that solution and what Pennsylvania needs and requires, additional action could be taken, Ron Gallagher, deputy commissioner in the department’s office of market regulation, said in an interview.

Currently there is an NAIC model on the books, Model # 573, which addresses this issue, according to Rosanne Placey, the department’s press secretary. The model was developed 15 years ago to provide disclosures about these types of accounts, she said.

Gallagher says that the commissioners will examine the issue independent of what New York’s Cuomo finds, but will look at all facts that arise including findings from that investigation. Pennsylvania also plans to review complaints it has received to determine if there are any issues that need to be addressed, according to Gallagher.

Possible Regulatory Solutions

If commissioners decide to proceed with additional consumer protections there are several ways they could do this. They could create questions in the market conduct annual statement that would specifically address these questions and require responses from insurance companies.

They could also create a new line in data provided in its Consumer Information Source which tracks complaint data in categories including underwriting, and marketing and sales. The marketing and sales category has lines for suitability complaints, misleading advertising and misrepresentation as well as fraud/forgery.

However, a review of the CIS system did not uncover a line for disclosure complaints. Such a line could be further broken out to include lines for disclosure complaints at the time of sale and at the time a death claim is made.

Disclosure has been an issue that the NAIC has been addressing for the past decade in various ways. Currently, a working group is looking at solutions for proper annuity disclosure.

And, if ultimately, there does turn out to be any wrongdoing, Attorneys General as well as state insurance commissioners do have the authority to address problems that come to light.

Strengthening Disclosure

To AG Cuomo’s point, a review of disclosure should include making certain that beneficiaries know all the options they have before agreeing to a retained asset account; knowing the spread between the interest rate that they are receiving and what the insurer is receiving on the monies in those accounts; knowing if there are any fees associated with these accounts; knowing the difference between FDIC guarantees and state insurance fund guarantees in the specific state they live in; and, knowing the process of using a “check book” tied to the retained asset account.

In the “Fundamentals of Insurance for Financial Planning,” by Burton T. Beam, Jr., David L. Bickelhaupt, Robert M. Crowe, and Barbara S. Poole, several types of death benefit options are described. One, the interest option, is similar to the retained asset account option. But other options detailed include the fixed-period option which pays out death proceeds and interest over a specified time period. Similarly, a fixed-amount option uses a specified amount rather than a time period. And, a life income option, according to the book, details how death benefits are used to buy a single premium annuity for the beneficiary.

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