Haris Ashley
A retained asset account is a type of life insurance policy that allows beneficiaries to receive death benefits without immediately receiving a large sum of money. Instead, the beneficiary can access the funds through a checking account with a guaranteed minimum interest rate, provided and managed by the insurer. This option was introduced in 1984 to give beneficiaries more time to decide how to use their money and to avoid the financial stress associated with death. While retained asset accounts offer flexibility and safety, there have been concerns about insurance companies abusing the system by withholding interest from beneficiaries and providing unclear terms and conditions.
| Characteristics | Values |
|---|---|
| Initial balance | Life insurance or annuity death benefit |
| Functionality | Operates like a checking account |
| Interest rate | Minimum rate guaranteed by insurer; additional interest credited at a rate declared by the insurer |
| Credited interest | Not income-tax exempt |
| Creditor protection | Applicable as long as the death benefit remains with the life insurer |
| Safety | Funds are held by the insurer, not in a bank or other institution |
| Access | Beneficiaries have full access to the funds at all times |
| Checks | Free |
| Account reports | Periodic |
| Investment risk | Borne by the insurer |
| Rate of return | Guaranteed positive irrespective of market conditions |
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What You'll Learn
- Retained Asset Accounts (RAAs) are a type of life insurance settlement option
- RAAs are established by insurers upon the death of the insured
- RAAs operate like a checking account with a guaranteed minimum interest rate
- RAAs are considered safer than bank accounts, with no historical losses
- RAAs are criticised for potential insurer abuse and low beneficiary interest rates
Retained Asset Accounts (RAAs) are a type of life insurance settlement option
As a result, beneficiaries sought a way to keep their money safe and available until they were better able to use it. This led to the creation of RAAs, which are essentially checking accounts with an initial balance that is the life insurance death benefit. The money can be withdrawn immediately by writing a cheque for the full amount, or it can be left in the account for as long as the beneficiary wants. The principal and a minimum rate of interest are guaranteed by the insurer, with additional interest credited at a rate declared by the insurer. This rate is comparable to that paid in similar accounts offered by banks and money-market mutual funds.
RAAs are established by the insurer upon the death of the insured and are set up in the beneficiary's name. The beneficiary can then withdraw the funds as they see fit. The money in an RAA is protected and the beneficiary has full access to the funds at all times. The funds are also income-tax exempt. The insurer bears all the investment risk and guarantees a positive rate of return, irrespective of market conditions.
However, there have been some concerns and issues with RAAs. In 2010, the New York Attorney General and other state attorneys general initiated an investigation into leading life insurance companies over their alleged abuse of RAAs. They accused insurance companies of failing to make beneficiary payments, not paying fair interest rates, and failing to explain the RAA's terms and conditions.
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RAAs are established by insurers upon the death of the insured
A Retained Asset Account (RAA) is a settlement option that operates like a checking account. It was established in 1984 as an alternative to the default option of receiving a lump-sum payment as the death benefit from a life insurance policy.
Upon the death of the insured, an insurer typically establishes an RAA and agrees to pay the beneficiary a settlement of the life insurance proceeds. The insurer deposits the funds into an account in the beneficiary's name, often an interest-bearing draft or checking account. The beneficiary can then withdraw the funds using a draft book or checkbook. The principal and a minimum interest rate are guaranteed by the insurer, and additional interest is credited at a rate declared by the insurer. This interest rate is comparable to that of similar accounts offered by banks and money-market mutual funds.
RAAs are designed to provide beneficiaries with a safe and accessible repository for their funds while they consider how to utilise the life insurance proceeds. The money can be withdrawn immediately or left in the account indefinitely. The death benefit is income-tax exempt, although tax considerations may influence the timing of withdrawals to optimise tax advantages.
While the money remains with the insurer, it is protected from the beneficiary's creditors. The insurer bears all investment risks and guarantees a positive rate of return, even if their investments perform poorly. However, there have been concerns and investigations into some life insurance companies regarding their handling of RAAs, including allegations of failing to make beneficiary payments, paying unfair interest rates, and providing insufficient explanations of the RAA terms and conditions.
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RAAs operate like a checking account with a guaranteed minimum interest rate
A Retained Asset Account (RAA) is a settlement option that operates like a checking account. The initial balance in an RAA is the death benefit from a life insurance policy, and it is designed to be a repository of funds for beneficiaries of life insurance policies. RAAs guarantee a minimum interest rate, with additional interest credited at a rate declared by the insurer. This interest rate is comparable to that paid in similar accounts offered by banks and money-market mutual funds.
The money in an RAA can be withdrawn at any time by writing a check for the full amount or in part. The beneficiary has full access to the funds at all times, and the money is protected and safe. The death benefit is income-tax exempt, although there may be tax implications to consider when deciding when to withdraw the money.
The insurer guarantees the principal and a minimum interest rate, and the money is protected by the insurer, even in the event of market downturns. The beneficiary can withdraw the funds by presenting a draft to the bank or institution, and the insurer will then deposit the funds into the account. The beneficiary receives free checks and periodic reports on the status of their account.
In some cases, the RAA may be established in a bank or other financial institution, and the beneficiary can choose to access the full life insurance proceeds or the remaining balance in the account. It is important to note that the money in an RAA is beyond the reach of the beneficiary's creditors while it remains with the life insurer. However, once the money is released, creditor protection no longer applies.
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RAAs are considered safer than bank accounts, with no historical losses
A Retained Asset Account (RAA) is a type of deferred payment arrangement offered by some insurance companies as an option for beneficiaries to receive death benefit proceeds. When a policyholder passes away, their beneficiary has the option to take the death benefit in a lump sum or through an RAA, which functions similarly to a checking account. RAAs are considered a safe and secure option for beneficiaries as the funds are kept with highly rated banks and are FDIC-insured, providing an extra layer of protection.
One of the key advantages of RAAs is that they are considered even safer than traditional bank accounts. This is because the funds in RAAs are not commingled with the general assets of the insurance company, which offers a level of protection not typically associated with traditional banking. In the unlikely event of insurance company insolvency, the funds in RAAs are protected and would not be subject to the claims of creditors. This separation of assets is a critical feature that sets RAAs apart and makes them a lower-risk option.
Historically, there have been no losses associated with RAAs, further emphasizing their safety and reliability. This track record provides peace of mind and assurance to beneficiaries who choose this option. The FDIC insurance coverage, combined with the separate and protected nature of the funds, ensures that beneficiaries can access their full death benefit proceeds without worry. This historical context is important when considering the safety of RAAs and sets them apart from other investment or savings options that may carry more risk.
The safety and security of RAAs are further enhanced by the insurance industry's robust regulatory framework. State insurance regulators closely monitor insurance companies, including their use of RAAs, to ensure compliance and protect consumers. This additional layer of oversight provides added confidence in the integrity and security of these accounts. The combination of FDIC insurance, separate asset protection, historical performance, and regulatory oversight makes a compelling case for the safety of RAAs.
In summary, RAAs offer a unique combination of features that make them a safe and attractive option for beneficiaries. The separation of funds, FDIC insurance coverage, and regulatory oversight provide multiple layers of protection. Additionally, the historical performance of RAAs, with no losses incurred, further reinforces their reliability. For beneficiaries seeking a secure and accessible way to receive death benefit proceeds, RAAs are a compelling choice, offering both peace of mind and flexibility. This information highlights the key advantages of RAAs and why they are considered a lower-risk alternative to traditional bank accounts.
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RAAs are criticised for potential insurer abuse and low beneficiary interest rates
Retained-asset accounts (RAAs) have been a source of controversy and criticism due to concerns about potential insurer abuse and the typically low interest rates offered to beneficiaries. The controversy surrounding RAAs centres on the potential for insurers to benefit financially from the delay between the death of the policyholder and the disbursement of funds to beneficiaries. During this period, the insurance company continues to earn investment income on the retained assets, which can be substantial if there is a significant delay in payout. This situation creates a conflict of interest, as insurers may have an incentive to delay or obstruct the payout process to prolong their access to these funds.
In some cases, insurers have been accused of failing to adequately inform beneficiaries about the option to receive a lump-sum payment or of using complex and confusing language in their communications, making it difficult for beneficiaries to understand their rights and options. This lack of transparency and potential for manipulation has led to regulatory scrutiny and legal action in some jurisdictions. To address these concerns, some insurance companies have implemented reforms, including improving disclosure practices and providing beneficiaries with more explicit information about their options for receiving death benefits.
Another point of criticism regarding RAAs is the often low-interest rates offered on the accounts. The insurance companies typically invest the retained assets conservatively, generating relatively low returns compared to other investment options. As a result, beneficiaries may earn minimal interest income on the balances in their RAAs, especially during periods of low-interest rates in the broader economy. This situation can be particularly disadvantageous for beneficiaries who maintain balances in their RAAs for extended periods, potentially foregoing more lucrative investment opportunities or higher-interest-bearing accounts.
Low interest rates on RAAs can also create a perception of unfairness, as insurance companies benefit from investing the retained assets while beneficiaries receive meagre returns. This dynamic has fuelled the argument that insurers use RAAs as a source of cheap funding, effectively subsidised by the beneficiaries. To address this concern, some insurers have introduced policies that guarantee a minimum interest rate on RAAs or offer beneficiaries the option to transfer their balances to higher-yielding investments after a certain period.
In summary, the controversy surrounding RAAs stems from the potential for insurer abuse and conflicts of interest, as well as the typically low interest rates offered to beneficiaries. While reforms have been implemented to improve transparency and disclosure practices, critics argue that more stringent regulations and oversight are needed to protect the rights and interests of beneficiaries. As the use of RAAs continues to evolve, finding a balance between the interests of insurance companies and beneficiaries will be crucial to ensuring the fair and equitable treatment of all parties involved.
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Frequently asked questions
A retained asset account is an account whose initial balance is a life insurance or annuity death benefit and that operates like a checking account.
When a policyholder passes away, the insurance company pays the policyholder's designated beneficiaries a sum of money. The beneficiary can then choose to put the money in a retained asset account, which is established by the insurer. The beneficiary can then withdraw the money at any time by writing a check for the full amount or leave it in the account to earn interest.
The money in a retained asset account is protected and the beneficiary has full access to the funds at all times. The money is also income-tax exempt, and the beneficiary does not have to worry about managing large sums of money immediately after the death of a loved one.
There have been some concerns about insurance companies abusing retained asset accounts by holding onto the cash in the account for as long as possible to earn interest, failing to pay fair interest rates to beneficiaries, and not explaining the account's terms and conditions clearly. In 2010, the New York Attorney General and other state attorney generals initiated an investigation into leading life insurance companies over these alleged abuses.
