Retained Asset Accounts Blog

In the weeks preceding Election Day it was mighty quiet on the Retained Asset Account front. The politicians who quickly rushed to pile on got their names in the newspapers. That seemed to satisfy them, as none seems to have had any interest in anything more. By way of illustration, not one of the dozen-plus United States Senators, Representatives, state legislators, state attorneys general or state insurance departments I wrote to in September expressed any interest in learning anything about the background of the Retained Asset Accounts programs (which have been in widespread use and had been rather universally praised since 1984).

None of them even expressed the slightest bit of interest as to why, having been the inventor of the concept, I now have concluded a Bill of Rights for beneficiaries paid via Retained Asset Accounts is now necessary to assure that EVERY beneficiary will be better off having been paid via an RAA instead of a single check or draft.

Perhaps because the day before Election Day is a slow news day, Bloomberg, whose July, 2010 RAA story was spun to create a furor — stating that Prudential was profiting from dead soldiers — came out with an article on RAAs today.Today’s story (and I’ve seen two versions, one short and one shorter) at http://www.bloomberg.com/news/2010-11-01/prudential-accounts-unlawful-american-legion-tells-court.html ) Bloomberg notes that the American Legion has sought permission to intervene and file papers in a lawsuit that had been brought in Massachusetts by a beneficiary of a deceased military serviceperson. The American Legion proposes to argue that the practice of Prudential paying beneficiaries well above the market rate of interest on policy proceeds paid using Pru’s version of the RAA, is “unlawful and dishonest.”

I respect the American Legion’s efforts to do well by our military. But have they any idea what the result would be if insurance companies stopped paying death proceeds by means of an RAA? The beneficiaries would be forced to make an immediate decision on how to deal with the current amount of death benefit for active duty personnel — $400,000. The $400,000 lump sum check would have to be deposited in a bank, whose FDIC insurance is limited to $250,000. If it stayed there in a checking account it would earn zero to 0.15% interest. (Bank of America and Chase Bank are paying me 0.01% on my checking with accounts.) Ditto if the funds were moved into a money market account at the average bank. If the funds were moved into a typical money market mutual fund the rates would not improve, and there would be no insurance backstop whatsoever. And those beneficiaries who put all the money in a bank or fund that remains solvent and let it sit there until they regain their composure would be, unfortunately,  the relatively fortunate ones.

The sad fact that the American Legion and many others fail to grasp is that too many grieving beneficiaries who are immediately forced to “do something” with a large death benefits check do something wholly inappropriate with the funds. Poor investments, overly generous gifts, extravagant and unwarranted spending, and fraud parts far too many beneficiaries from their money.  The RAA enables the money to sit there, earning interest, while the funds are protected and guaranteed by the life insurance company paying the proceeds, whose guarantee is backed up in 49 of the 50 states to an amount well above the FDIC’s $250,000 limit by state life insurance guarantee associations.

Presumably the point the American Legion wants to make is that life insurance companies should well above market interest rates. Of course Prudential has been doing that — it has recently been paying 0.50% on newly established accounts — while that may be pitifully low by historic standards, it’s still several times higher than prevailing money market interest rates. (Prudential continues to pay far higher rates on older RAAs.)

Obviously the American Legion would want Prudential to pay the even higher portfolio rate Prudential is earning on its General Account. Obviously everyone would like to earn more. And maybe Prudential could and should pay a higher or tiered rate. But no financial institution could remain in business by paying out everything it earns from its investments, without regard to its costs, the different maturities of the investments, the different risk characteristics of its investments, or regulatory requirements. Prudential  certainly should pay a competitive rate, but not paying the portfolio rate does not make Prudential dishonest.

Legislation requiring full disclosure with regard to Retained Asset Accounts used to pay death benefits under the Servicemembers’ Group Life Insurance Program passed the House of Representatives yesterday by a bi-partisan 358-66 vote. The proposed “Securing America’s Veterans Insurance Needs and Goals Act of 2010” (H.R. 5993) was introduced in July by Congresswoman Deborah L. Halvorson, a freshman Democrat representing Illinois’ 11 Congressional District in the southern suburbs of Chicago. Among the legislation’s co-sponsors is Representative John Garamendi, a former California Insurance Commissioner and former California Lieutenant Governor.

If approved in what will be a lame duck session of the US Senate in November, the legislation (S.3718) would require any life insurance company providing life insurance for veterans under the Servicemembers’ Group Life Insurance program to (1) provide financial counseling to the beneficiary or other person entitled to payment upon the establishment of a valid claim and (2) include full disclosure with respect to such payment, including advantages and disadvantages of maintaining such payment with the company versus a financial institution. It would also prohibit a life insurance company from charging fees to a payee for maintaining such payment in a retained asset account with the insurance company.

The text of the proposed law states that “a life insurance company shall (A) make available, both orally and in writing, financial counseling to a beneficiary or other person otherwise entitled to payment upon the establishment of a valid claim….; and provide beneficiaries with oral and written disclosure of
“(i) the methods available to receive such payment, including–
(I) allowing the insurance company to maintain the payment;
(II) lump-sum payment; and
(III) any alternative methods;
(ii) an explanation that any such payment that is maintained by the life insurance company is not insured by the Federal Deposit Insurance Corporation;
(iii) an explanation that interest earned on any such payment that is maintained by the life insurance company will be comparable to on-demand account interest rates; and
(iv) other relevant information.”
In addition the proposed law states “a life insurance company may not charge any fees to a beneficiary … with respect to maintaining such payment with the company” with regard to the Servicemembers’ program.

The immediate effect of the proposed legislation would be nil, as the sole provider of life insurance under the Servicemembers’ Group Life Insurance Program is the Prudential Life Insurance Company of America. Most insurance companies had been making the disclosures specified in the proposed legislation long before Bloomberg ran its article by David Evans in late-July, and even as sluggish a company as Prudential almost certainly would have been doing so.

One might question the wisdom of enacting into law a requirement that the life insurance company making the payment – rather than a neutral objective party – also provide the required financial counseling to Servicemembers’ beneficiaries. While that seems to pose somewhat of a possible conflict of interest given the possible self-interest of the insurance company in the advice it provides, the provision of advice as part of the payment process has long been a part of the way the Servicemembers’ program operates.

Bloomberg is trying to keep the Retained Asset Accounts pot boiling with a September 28, 2010 article provocatively headlined “MetLife Probed as Asset Accounts Called Deceptive.” http://www.bloomberg.com/news/2010-09-28/metlife-a-focus-of-regulator-probes-as-judge-calls-asset-account-deceptive.html The article centers on dicta contained in a September 9, 2010 Order issued by Federal Judge Larry R. Hicks, in the US District Court in Reno, Nevada that dismissed all remaining claims in a lawsuit brought by a life insurance beneficiary against MetLife.

Judge Hicks pointed out that the beneficiary, Jamie Clark, was paid by MetLife through its Total Control Account Money Market Option. He also points out that during the August 2006 to September 2007 the death benefit proceeds she received were in the account she was credited with interest rates from 3.8% to 4.2% “while the relevant money market rate index ranged from 0.78% to 0.94% during the relevant time period. Thus, Clark earned more interest through MetLife’s TCA than she would have earned if the money had been placed in a money market account.”

An insurance company paying 300 basis points above money market rates certainly sounds like a great consumer benefit to me.

Judge Hicks did say he found that the name of the account “is inherently deceptive because it gives the beneficiary the impression that the account is either a money market account, or is associated with a money market account, and contains the same benefits and protections that a money market account offers, namely that the account is insured by the Federal Deposit Insurance Corporation if MetLife was to become insolvent and file for bankruptcy.” Of course, that statement is pure dicta — and also lacks any basis in fact. Perhaps the Judge was not aware of the hundreds of money market mutual funds, and that MetLife repeatedly disclosed that IT guaranteed the funds in the account and never suggested it was FDIC insured. MetLife also could not state that it was itself guaranteed by the 50 State’s Life and Health Insurance Guarantee Associations as state laws prevent companies from disclosing that fact in most circumstances.

In response to comments posted on August 31, 2010 by Huffington Post blogger Charles H. Green referring to the Retained Asset Account controversy as a “grossly over-hyped non-story,” Advocate Law Group attorney Gerry Goldsholle posted this on September 1, 2010 on the Huffington Post:

What I have found most amazing is that a 26 year old program that from its inception won media acclaim from independent financial experts (such as Sylvia Porter), that was vetted and demanded by major unions (such as the UAW), major private sector employers (such as GM, GE and IBM) and public sector employers (such as the Federal Office of Personnel Management and NY State Civil Service Commission), that successfully paid out hundreds of billions to millions of beneficiaries, that pays beneficiaries continuous interest, even while a check would be in the mail, at higher rates than most banks, and is backstopped by all 50 State Life Insurance Guarantee Funds to levels that had been at least as high as the FDIC’s limit (and in many states beyond the FDIC’s new $250,000 limit), could spark ANY media interest at this time.

Having left the insurance industry nearly 20 years ago, and now a lawyer representing plaintiffs in cases AGAINST insurance companies (see www.AdvocateLawGroup.com), I don’t doubt that some insurers could corrupt any process. Yet neither the media, nor the handful of lawyers seeking a windfall seem to have generated any recent examples of actual abuse or loss. Perhaps that’s because most insurers still adhere to the design I rolled out 26 years ago which endeavored to make sure EVERY beneficiary would be better off being paid via a Retained Asset Account than a check.

The Huffington Post on August 30, 2010 published a new story about case filed in Federal Court in Massachusetts in July. The story says the litigation has now added 5 more claimants and is seeking class action status on behalf of the families of all deceased servicemen who received death benefits via a retained assets account under the Servicemen’s Group Life Insurance Program operated by Prudential Financial Group for the Department of Defense. The lawyers, who seem to have dollar signs in their eyes, accuse Prudential of profiting from the dead soldiers’ policies.The article notes that a similar case was recently thrown out in the Federal Court in New Jersey. The essence of their claim seems to be that the families of the deceased should have been paid the higher long term interest rates Prudential earns on its overall investment portfolio, rather than the lower money market rate that Prudential pays on the account. Of course the one-half of one percent (0.50%) rate Prudential now pays on newly established accounts is at least as high as what banks and money market mutual funds are now paying on similar deposits. In fact the rate is exactly what 2 year US Treasury notes are yielding today — but the money in the Pru accounts is not locked in for 2 years.)  Is it possible that the lawyers bringing the suit are the ones seeking to profit from families of deceased military — the article does not suggest they will be working for free? Advocate Law Group’s Gerry Goldsholle commented on the article as follows on August 31, 2010:
I am the guy who, as a VP at MetLife, invented Retained Access Accounts in 1983. I left the insurance industry in 1991. My law firm, Advocate Law Group P.C., regularly sues insurance companies on behalf of consumers nationwide. Yet I strongly believe Retained Asset Accounts are valuable to beneficiaries. True, insurers earn a spread between the long-term rates they earn and the short term rates they pay. Just like banks. Welcome to America.

Retained Asset Accounts should pay immediate and continuous interest, at rates guaranteed to exceed bank and money fund averages. Beneficiaries can simply write a check/draft to immediately withdraw all or any part of the money or pay bills; lump-sum checks/drafts often took weeks to clear. The insurance company that issued the policy and paid the claim guarantees the funds. The accounts I designed were also backed-up by state insurance guarantee funds — typically to higher limits than the $250,000 the FDIC only recently reached.    NOTE: The Huffington Post limits comments to 250 words. Lots more could have been said.