Should I elect to take life insurance benefits through a Retained Assets Account? Should I leave my money in a Retained Assets Account at the insurance company? If so, for how long?
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UPDATED: Sep 15, 2020
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Many large life insurance companies automatically pay death benefits of $25,000 or more to insurance beneficiaries by sending the beneficiary a checkbook or draft book (they look and work the same way for all practical purposes). The checks enables the beneficiaries to access all or part of the death proceeds simply writing a check and drawing the money down from a special interest bearing account the insurance company automatically sets up for them. Other insurance companies sometimes offer the checkbook instead of a check method of payment only to selected policyholders as an alternative to a single check.
These accounts, which are generically known as Retained Assets Accounts (although each insurance company has its own brand name for its own version of the account) have been widely applauded as a major consumer benefit since they were first introduced in the mid-1980s.
Payment through a retained assets account is typically made in the exact same time frame as the single check method of payment. However, if taking payment via the single check method, it typically takes quite a long time before the beneficiary can actually use the proceeds to pay bills. With a single insurance company check that is mailed to the beneficiary, the check has to be deposited in a bank and clear the bank before the funds can be accessed. As the size of the check deposited is likely much larger than the balance the depositor customarily maintains, holds of over a week or two or longer are not uncommon. With the checkbook method the beneficiary can start writing checks to pay bills and get cash immediately, thus there is faster access to the funds, without having to waiting for insurance check to clear.
With the single check method the beneficiary earns no interest on the proceeds once the check is cut by the insurance company. With the checkbook method, interest immediately starts accruing on the underlying account for the beneficiary.
The accounts provided by the insurance companies are also free. Most insurance companies have historically paid interest at rates significantly higher than what is available for similar accounts from most banks on money market or other deposit accounts, or money market mutual funds. Many insurance companies even guarantee the rates they pay will always be equal to or higher than an outside index.
Just like banks profit from a “spread” (they earn a higher rate on their investments than they pay to the depositor) , the insurance companies also earn a spread between the rate they earn on their investments and the rate they pay on the retained assets accounts. As well managed banks and life insurance companies all invest relatively similarly and conservatively, how can the insurance companies generally credit beneficiaries with higher interest rates on retained assets accounts than banks would pay depositors on the same funds?
The insurance companies can pay higher rates because they do not have to incur the major cost of acquiring new funds. All those branches and tellers and bank advertisements designed to get you to make deposits at bank X or bank Y are very costly. In contrast, when an insurance company pays out death benefits, the proceeds start out at the insurance company and thus it essentially has a zero cost of acquisition.
You always should ask the insurance company what rate it is paying on the accounts, and check the rate periodically to make sure it is still relatively attractive.
You should also make sure that the insurance company is financially strong and check to see that it remains strong. The insurance company’s financial strength backs up the funds in your account and all other policy benefits. You can check the company’s ratings from such firms such as Bests, Standard & Poors and Moody’s. Remember that the life insurance companies are heavily regulated.
Most retained assets accounts are further protected by your state’s life insurance company guarantee fund that is somewhat comparable to the FDIC. Just as the FDIC has limits as to how much it will protect of any one depositor at any one bank, so do state insurance guaranty funds limit their protection per person per insurance company. The state limits vary, and range from $100,000 to $500,000. (You have to ask the insurance company about the life insurance guarantee fund and the applicable limits as by law in most states the company can not broadcast the fact that there even is a guarantee fund.)
Just as with most other things in life, some diversification is usually a wise idea. Folks with large assets generally know not to keep all their assets at any one bank or brokerage firm. Some diversification always makes sense.
How long someone should leave your funds in a retained asset account is a personal choice. A beneficiary is under no obligation to maintain the retained assets account and can simply write a check for the full amount and close the account.
Most beneficiaries do maintain at least some significant part of the insurance money in the retained assets accounts for at least 6 months to 2 years. Some retained asset accounts have been maintained by beneficiaries for more than 20 years. As noted earlier the interest rates are often very favorable, the proceeds are backed by the full financial strength of the insurance company (and in many cases further backstopped by the applicable state life insurance guarantee fund), the account is free, and funds are readily accessible when needed. Yet one of the greatest benefits of retained asset accounts has nothing to do with investments or returns or safety.
Retained asset accounts give people time to decide at a very difficult moment in their lives. Repeated studies have shown that people who inherit large sums – through bequests under Wills or from life insurance, just as people who win lotteries – often burn through the money within a few years. The money looks like a large sum, and they spend it, often recklessly, give it away to family and charities in an amount detrimental to their own financial security, or make unwise and inappropriate investments with the money, or being vulnerable are swindled out of it.
Retained assets accounts help people mentally separate their life insurance proceeds – which are typically required for one’s long-term financial security – from everyday money and thereby protect themselves for the long haul.