One of the most respected critics of the life insurance industry, Joseph M. Belth, Professor Emeritus of Insurance at the Kelley School of Business at Indiana University, Bloomington, made a series of thoughtful comments on Retained Asset Accounts in the October 2010 issue of The Insurance Forum, his widely read newsletter, and has promised to comment further on RAAs. This addresses some of his points.
In the Insurance Forum article Professor Belth correctly notes that insurance companies provide beneficiaries with books of “drafts” rather than “checkbooks.” He notes that money market mutual funds, such as Vanguard, also use drafts but refer to their draft-books as check-books. While there are legal differences between checks and drafts, the technical differences are rather arcane and are not well understood by the average lawyer, much less the average consumer or beneficiary. Further the practical difference is nil in the context of the ability of beneficiaries paid through Retained Asset Accounts to use the drafts to pay bills or to withdraw funds. While the companies should make disclosure that the “checks” are technically “drafts” (many do, based on materials I have viewed over the decades) unlike Dr. Belth I fail to see any sin in also using the shorthand “checkbook” to describe the withdrawal mechanism. Insurers should be encouraged to make everything they do easily understandable. Requiring insurers to exclusively use a term that is not readily understood would be a step in the wrong direction serving no practical purpose.
Professor Belth also takes issue with labeling RAAs “accounts” rather than “arrangements.” He concludes (without any authority) the term “account” implies creation of a bank account. Given the widespread use of the term “account” in connection with such things as securities brokerage accounts, credit card accounts, department store accounts, to regard “accounts” as the exclusive province of banks is rather puzzling.
The major point Professor Belth raises — and one that s deserving of greater attention — relates to the interest rates life insurance companies credit on their Retained Asset Accounts vs. the rates they pay on their traditional settlement options. I’ll address this further in a future posting, but for now let me point out that built into most life insurance policies is the opportunity to elect a “settlement option” in lieu of immediate lump sum payment.
The traditional settlement options baked-in to each policy vary by policy and company. They typically include (1) holding the proceeds at interest, with a minimum rate guarantee (the interest only option) although companies can pay more, (2) payment of the death benefit over a period of 5, 10 or 20 years, with interest built in (an “annuity certain” option), and (2) various annuity options (also containing built in interest assumptions) with life contingencies.
In the vastly different socio-economic environment of the 1920s and 1930s, a significant percentage of life policyholders (nearly all of whom were men) pre-selected longer term settlement options to “protect” their spouses (i.e. wives). However, when Retained Asset Accounts debuted in the 1984, only a minuscule percentage of policies were being paid via a traditional settlement option — usually where the original policyholder had pre-selected one. Few beneficiaries could fight their way through confusing language in the policy itself or the claim form to recognize that a settlement option actually made sense.
In 1984 banks were only paying about 3% on their passbook savings accounts and zero on checking accounts. Money market mutual funds were yielding in the neighborhood of 7-8%. The rate life insurance companies were paying on their interest only settlement options was closer to bank passbook rates than money market interest rates. Beneficiaries in retained asset accounts were thus better off. If in the current historically low interest rate environment insurance companies have not addressed the issue of equity among settlement option interest rates, they may well have a problem.
The Total Control Account(r) I created at MetLife guaranteed the rate that it would pay to beneficiaries would always be equal to or higher than a national index of money market mutual fund rates or national interest of bank money market accounts, and with the approval of the investment executives, we also we also built in a 3% floor. It also provided that any beneficiary could also switch funds from the Total Control Account to any other settlement option built into the original policy. In my proposal for a Retained Asset Accountholder’s Bill of Rights, see http://www.retainedassetaccounts.com/bill-of-rights-retained-asset-accountholders.htm, I have urged that all retained asset accountholders be granted that same right.
Professor Belth also discusses the issue of dormant accounts — where accounts sit idle for years, only earning interest without any “checks” or withdrawals being made, and without contact from the beneficiary/accountholder — such as for a change of address, or giving instructions to the insurance company to continue to maintain the account. In such cases the ever more greedy state governments can seek to apply their general “escheat” laws. The issue here is that as the states become hungrier, they have shortened the period at which escheat begins, and once funds have to be paid by the insurance company (or bank or brokerage firm) via escheat to the accountholder’s last state of residence, interest stops (although the beneficiaries can still get the funds back from the state). This is an issue that insurance companies should have addressed years ago and is identical to the issue banks, mutual funds and brokers face.
