Life insurers will face tighter restrictions against holding beneficiaries’ funds under a directive to be made by the New York Department of Financial Services, according to a person with knowledge of the plan.
Insurers will be required to issue a check to the survivor as the default option, under a mandate that will probably be made by the end of the month, said the person, who declined to be identified because there was no statement from the regulator. The carriers will only be able to hold the funds if a beneficiary authorizes the use of a retained asset account, the person said.
Under those accounts, insurers issue checkbook-like IOUs to survivors and profit by investing the money, paying only when beneficiaries write drafts on the account. Andrew Cuomo, then New York’s Attorney General, began investigating the practice in 2010 after Bloomberg Markets reported that 100 carriers earn investment income on $28 billion in retained-asset accounts.
“The substantial interest earned on these accounts mostly benefit and enrich the insurers at the expense of the families to whom the money really belongs,” Cuomo said after Bloomberg published “Duping the Families of Fallen Soldiers.” Cuomo is now governor of the state.
Prudential Financial Inc., the second-largest U.S. life insurer, has an exclusive contract to provide life insurance to about 6 million U.S. military personnel, their immediate families and veterans. In September 2010, the Department of Veterans Affairs reversed a policy that since 1999 allowed Prudential to automatically withhold lump-sum payments to survivors by issuing accounts.
MetLife Inc. earned $267 million in net investment income on $12 billion of beneficiary money it held in retained asset accounts in 2010, according to the U.S. Government Accountability Office. MetLife, the largest U.S. life insurer, operates the Federal Employees’ Group Life Insurance program for about 4 million federal employees.
Bob DeFillippo, a spokesman for Newark, New Jersey-based Prudential, and MetLife’s Christopher Breslin declined to comment on the mandate or its potential costs. Whit Cornman, a spokesman for the American Council of Life Insurers, said the trade group wouldn’t have a comment until it reviewed an official document.
Susan Nolan, executive director of the National Conference of Insurance Legislators, said that New York may be the first state to require a check to be the default option for life-insurance payouts.
Prudential and New York-based MetLife had said the retained asset accounts benefited clients and reduced pressure on survivors to make investment decisions while grieving.
“When consumers have the option to choose between RAAs and lump-sum check payments, the overwhelming majority choose lump-sum check payments,” the GAO said in a report last year.
A California law this year began requiring life insurers to get written declarations from beneficiaries about how they want to be paid. U.S. insurers are regulated by state watchdogs including Benjamin Lawsky, superintendent of New York’s Department of Financial Services.
In 2010, the conference of legislators adopted a “Beneficiaries’ Bill of Rights” to increase oversight of retained asset account disclosures.