What are life insurance retained asset accounts?

Mary Lou Jay

A life insurance policy is meant to provide financial assistance to survivors of the insured, not to give them additional stress. But trying to decide how to deal with a policy payout -- sometimes a very large payout -- can be daunting for family members already trying to cope with all of the emotional, financial and legal implications of a loved one's death.

That's why life insurance companies began offering retained asset accounts (RAAs) back in 1984, according to the Insurance Information Institute. When life insurance policyholders choose an RAA for their benefit payout, the policy's beneficiaries don't receive a lump sum when the insured person dies. Instead, the insurance company retains the payout in an interest-bearing account and sends the beneficiaries checks that they can use to draw on that account.

Beneficiaries can write checks until they've exhausted all of the proceeds of the policy. If they choose to write a single check for the entire amount of the policy and deposit it into their own bank account, they can do that. Or they can just keep all or most of the policy payout in the retained asset account, where it will earn interest.

Some group-sponsored policies (life insurance you get through your employer) may require the use of RAAs for payouts, but they're usually just one of several payout options available. But some policyholders may sign up for an RAA payout without realizing it. A March 2011 study by the Texas Department of Insurance found that 44 percent of the 160 life insurance companies it surveyed offer RAAs, and that more than half of them make an RAA the default option on their policies.

Critics see several problems with RAAs. They believe that many policyholders don't take the time to read their policies carefully and therefore don't realize what they're signing up for. In addition, because the money isn't held in traditional bank accounts, but by the insurers, it isn't protected by the Federal Deposit Insurance Corp. (FDIC). The checks aren't always accepted by retails stores and other merchants, according to a 2010 ProPublica article, and the accounts may involve fees, according to the National Association of Insurance Commissioners.

Prudential Insurance has drawn a great deal of criticism for its use of RAAs in policies covering U.S. service personnel and has been accused of using RAAs as a means to earn money from the interest they accrue. In its defense, Prudential argues that beneficiaries are free to withdraw the entire RAA balance at any time. It says that its RAAs always have paid more interest than conventional banking accounts, and that the money, while not FDIC-insured, is protected by state guaranty funds that often provide more protection than the FDIC does.

The National Association of Insurance Commissioners advises anyone considering an RAA option to carefully read the terms of the life insurance policy to learn where the account money will be held, how interest rates will be determined and what service fees will be charged.