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.

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.

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 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.

In fact Pru was paying beneficiaries through retained asset accounts. The original article went on to attack RAAs generally, suggesting they were some big dark secret — even though they’d been widely reported on and applauded by the financial and popular media since I launched the first retained asset account program 26 years ago.

Scare headlines, carefully culled quotes, lawyerly selected partial facts (such as retained asset accounts — like ALL insurance products — do not have FDIC protection), with glaring omissions (such as that for nearly all of the past 26 years most retained asset accounts enjoyed a higher dollar level of protection from state life insurance guarantee funds than bank accounts were given by the FDIC) may sell magazines and newspapers, but wind up hurting beneficiaries.

Today a new Bloomberg story appeared under the headline “Veterans Agency Made Secret Deal With Prudential Over Benefits.” In it, Bloomberg goes out of its way to claim Prudential hid facts from 6 million servicemen and quotes someone who expressly accuses Pru of war profiteering.

I am no fan of Prudential. In fact I am one of many who regard the Pru as one of America’s dumbest and slowest moving large life insurance companies.

The Bloomberg story points out that although Pru got the green light from DoD to begin using its version of the Retained Asset Account in 1999 — over 15 years from the date the first retained asset account was launched — it didn’t get around to amending its group insurance contract with the Defense Department until 2009.

While that’s both slow and dumb on Prudential’s part, that Pru was using Retained Asset Accounts seems to have been very public — every claim form and every death benefit payment package explained things to those most involved, the beneficiaries.

In short, bit for the headline the Bloomberg article says nothing that suggests anything untoward or corrupt. The article also again fails to explain how beneficiaries receiving payment by “a checkbook instead of a check” are getting anything less than a lump sum.

In letters to the National Association of Insurance Commissioners, key Federal and state lawmakers, and several states’ Attorneys General, Gerry H. Goldsholle, who invented Retained Asset Accounts in 1983 while a Vice-President at Metropolitan Life Insurance Company, said “Beneficiaries paid through a Retained Asset Account should always be better off than they would have been if paid with a single insurance company check. To assure that is the case, all life insurance beneficiaries deserve the protections set out in the Bill of Rights for Retained Asset Accountholders.”

The proposed Bill of Rights for Retained Asset Accountholders is available at www.RetainedAssetAccounts.com.

“Over 120 additional insurance companies have tried to copy my concept, but not all insurance companies are providing beneficiaries with the same consumer protections I had insisted upon, and built into the original program,” says Goldsholle. The program Goldsholle created, named “Total Control Account,” was launched in 1984. MetLife’s program remains the largest of its type with over $10 billion on deposit, according to a story in Bloomberg Financial Markets September 2010 issue that sparked a media firestorm.

Key provisions in the proposed Bill of Rights include: Retained Asset Accounts are free, interest rates paid to beneficiaries must equal or exceed an independent outside index, and beneficiaries must have immediate access to funds by writing a check or draft. Additionally, all funds must be treated by the insurance company as the exclusive property of the beneficiary and beneficiaries must be informed that although accounts are guaranteed by the life insurance company and backstopped by their state’s Insurance Guarantee Association, they are not FDIC insured bank accounts.

Goldsholle elected early retirement as Chief Brokerage Executive of Metropolitan Life and President & CEO of MetLife Marketing Corporation in 1991. He went on to found Advice Company, a Sausalito, CA-based Internet company with leading consumer websites including www.FreeAdvice.com. He served as chair of insurance and government regulation committees for the American Bar Association, the New York City Bar Association and the State Bar of California. He is a founding principal at Advocate Law Group P.C. www.AdvocateLawGroup.com, a law firm representing consumers and small businesses nationwide in cases against insurance companies that wrongfully deny claims.

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.

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.