U.S. life insurers are “very proud” of the retained-asset accounts that allow companies to hold death benefits and earn interest on the funds because the practice gives bereaved beneficiaries time to decide what to do with the money, an industry group said today.
“It was a compassionate response to the grief that people feel after the loss of a loved one,” said Jack Dolan, a spokesman for the American Council of Life Insurers, in a conference call today held by the group.
Lawmakers including U.S. Senators Charles Schumer, Democrat of New York, and Arizona Republican John McCain have criticized the practice after Bloomberg Markets reported last week that the funds allow more than 100 carriers to earn income on $28 billion owed to life insurance beneficiaries. The funds aren’t guaranteed by the Federal Deposit Insurance Corp., which backstops bank accounts.
“The thought that this money is in a less secure location than in a bank is ill-founded,” said Paul Graham, the ACLI’s senior vice president of insurance regulation.
Most states say their guaranty plans would cover at least the first $300,000 in promised benefits should an insurer fail. That compares with a $250,000 backstop from the FDIC, Graham said.
MetLife Inc. and Newark, New Jersey-based Prudential Financial Inc. keep the death benefits in their corporate accounts and issue IOUs, which they call “checkbooks,” to survivors. Carriers profit by investing the funds in bonds and keeping the difference between returns and the interest they credit to the beneficiaries.
“It’s disgraceful on the part of insurance companies,” McCain said today in an interview on Bloomberg Television. “We’ll obviously have to be looking into it.”
Defense Secretary Robert Gates has pledged to help the U.S. Department of Veterans Affairs investigate the accounts on behalf of the families of deceased military personnel. Schumer has said he is drafting legislation that would require the VA and Office of Personnel Management to mandate that any life insurance company providing policies to military families must offer lump-sum payments of death benefits.
Dolan said the group has heard from its members that as many as 90 percent of beneficiaries withdraw the funds in a year or less. That number hasn’t been verified in a formal study, he said.
Insurers probably invest the funds in short-term holdings such as commercial paper and government debt and make a lower return than on securities that mature in a decade or more, Graham said.
“The types of spreads insurance companies are making on these accounts are very, very, very small,” said Graham. “Obviously having, as reported, some $28 billion of these accounts in force, very small spreads can in fact be meaningful to insurance companies.”
The profits made by insurers on the retained assets serve to strengthen the companies, which should provide policyholders with reassurance, said Graham.
“The fact that we’re making a little bit of money off of these is actually a benefit, not only to the insurance company, but to the consumers as well,” Graham said. “It’s important that we stay in business to pay everybody in the future.”