life-insurance personal finance

Life Insurance Retained Asset Accounts: A dubious deal for a death benefit

If you’re the beneficiary of a life insurance policy, you probably expect to receive a check in the mail. Unfortunately, your insurance company may have other plans.

Most insurers automatically move death benefits into retained-asset accounts unless requested otherwise. Insurers tout these accounts as prudent places to stash death benefits. But critics say they pay low interest rates, restrict survivors’ access to funds, and provide fewer protections than a standard bank account.

Retained-asset accounts have been around since the 1980s, and recently became the default option for federal employees pursuing life insurance. This policy was so unpopular that the Office of Personnel Management (which runs these life insurance programs) began requiring beneficiaries to choose a lump sum payout option instead.

Limitations of retained-asset accounts

If your insurer places your benefits in a retained-asset account, you’ll typically receive a book of “drafts,” which resemble checks and allow you to withdraw money from the account. Unlike checks, however, these drafts require the insurer’s permission before the money can be withdrawn. Retailers don’t always accept drafts and often set minimum withdrawal amounts — making retained-asset accounts relatively inaccessible.

When weighing a lump-sum payout against a retained-asset account, you should also compare the interest rate on the account with available bank products and investment vehicles. MetLife, for example, pays 0.5% on its retained-asset accounts. The highest-yielding money market deposit accounts, on the other hand, recently yielded roughly 0.9%.

In addition, beneficiaries of retained-asset accounts are poorly protected if their insurer goes belly up. The state guaranty associations which protect these accounts generally cover death benefits up to only $300,000. A lump sum payout policy, on the other hand, can protect all of the beneficiary’s money. The Federal Deposit Insurance Corp. covers up to $250,000 per depositor at each institution. As such, if you wish to protect figures higher than $300,000, you can simply distribute that money across several banks in sets of $250,000 or less.

Conclusions

Retained-asset accounts may still be valuable to some, particularly those who find receiving a large lump sum to be overwhelming. But insurance experts warn against leaving large sums in these low-yielding accounts for long periods of time. Generally, says Jeffrey Stempel, insurance law professor at the University of Nevada, Las Vegas, “the better thing is just to get control of the money as soon as you can.”

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