life-insurance personal finance

Life Insurance: A dubious deal for a death benefit

If you’re the beneficiary of a life insurance policy, you might be expecting to receive a check in the mail. But the insurance company may have another idea.

Many insurers automatically move death benefits into retained-asset accounts unless a beneficiary specifically requests a lump sum or other payout option. Insurers tout these accounts as prudent places to stash death benefits. But critics say they pay paltry interest rates, place restrictions on survivors’ access to funds and don’t provide the same protections as bank accounts.

Retained-asset accounts have been around since the early 1980s, but they have received scrutiny in recent years as federal employees and others were commonly defaulted into the accounts. The Office of Personnel Management, which administers the Federal Employees’ Group Life Insurance program, responded last year to concerns by requiring that most beneficiaries choose a payout option.

If your benefits are placed in a retained-asset account, you’ll typically receive a book of “drafts,” which resemble checks and allow you to draw money from the account. If you don’t want the account, you can write a draft for the full benefit amount and transfer the money to a bank or investment account.

When weighing a lump-sum payout against a retained-asset account, compare the interest rate on the account versus available bank products and investment vehicles. MetLife, for example, is paying 0.5 percent on its retained-asset accounts. The highest-yielding money market deposit accounts, however, recently yielded roughly 0.9 percent.

The drafts that allow beneficiaries to tap their money may look like checks, but, unlike checks, drafts require the insurer’s permission before the money can move where the beneficiary directs it. Retailers don’t always accept drafts, and there are often minimum withdrawal amounts.

Retained-asset accounts may not be fully protected if a life insurer goes belly up. The accounts are protected by state guaranty associations, which in most states provide coverage for death benefits up to $300,000. A beneficiary who took a lump sum and stashed $1 million in accounts at four different banks, however, could have Federal Deposit Insurance Corp. protection on the full amount, because the FDIC covers up to $250,000 per depositor at each institution.

Retained-asset accounts may still be valuable for some beneficiaries, particularly those who are dealing with an unexpected death and may be overwhelmed by receiving a large lump sum. Yet insurance experts warn against leaving large sums in the relatively low-yielding accounts for a sustained period. 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.”