Expert Blasts Insurance Practice As Deceptive

One insurance expert says the way life insurance companies use retained-asset accounts is atrocious. Insurance expert Jeffrey Stempel offers his insight.

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DON GONYEA, host:

When it comes time for the payout on a life insurance policy, most people probably imagine it to be a one-time, lump-sum check from the insurance company. But that's not always true. Some big insurers have figured out how to delay making the full payout. The practice was first reported by David Evans for Bloomberg Markets magazine, and was on NPR's ALL THINGS CONSIDERED last evening.

RENEE MONTAGNE, host:

It works like this: When a policy holder dies, major insurers like MetLife and Prudential immediately send a checkbook to the beneficiary. The checks are tied to something called a retained asset account. But the money in the account stays in the insurance company's coffers, not in a bank. And so those checks are not really checks. They're drafts for money that the insurance company holds and - this is key - earns interest on.

GONYEA: Jeffrey Stempel, a law professor at the University of Nevada Las Vegas, says these accounts carry some risk and are of disservice to policyholders.

Professor JEFFREY STEMPEL (Law, University of Nevada Las Vegas): The retained asset accounts are a way of basically keeping the money and earning 5 percent and paying half a percent to the beneficiary. It's a rip off. And it's a rip off that's inconsistent with the life insurer's duties to the beneficiary.

GONYEA: You mentioned that the accounts are unsafe. How so?

Prof. STEMPEL: You know, when I say unsafe, I don't want to suggest that they're, you know, teetering on the brink of complete failure. They're not as safe an FDIC bank account, and five will you get 10 that 99 percent of anybody who has these things thinks that they have the protection that they would have if they had the money in a banking checking account. And that's simply not the case. It's not risk-free. Neither is banking, but at least you have the FDIC and other government programs to essentially reduce that risk to almost nothing. You don't have those same protections in an insurance company's retained asset account.

GONYEA: It sounds like you're saying we have a regulatory gap here, that there's oversight that just isn't being done.

Prof. STEMPEL: I think that's right, and it's mostly state-oriented in insurance. But the state commissioners often don't have the resources to keep up, which is why the insurers' duty of good faith should be taken seriously. The insurance industry shouldn't be out there trying to stay one step ahead of the regulators in order to extract an extra buck out of the policyholders. They should be acting more honorably.

That said, you can't always count on that, and I think we need to invest more effort in more stringent regulation at the state level. But in the event that fails, litigation might be an effective way of doing this. I know that's not a fashionable thing to say now, but if a life insurer like MetLife or Prudential lost a big class action suit, that would get their attention pretty quickly.

GONYEA: How do you know if this is the kind of account you might have?

Prof. STEMPEL: Well, if I were a beneficiary, I mean, I think what I would do immediately, regardless of the kind of account, is I would take whatever funds that I am owed by an insurance company and I would put them in a standard financial institution. And I would consult with my own investment advisor about how best to deploy those funds.

You can certainly do much better than the retained asset account by simply putting that money in an FDIC-insured jumbo savings account.

GONYEA: According to reports, major insurers are sitting on some $28 billion still owed to survivors in these kinds of accounts. What guarantee do we have that if everybody starts pulling their money out, saying I want the lump-sum now, that insurers can cover it?

(Soundbite of laughter)

Prof. STEMPEL: Well, the run-on-the-bank sort of scenario I think is unlikely, because by definition, these insurance companies should have the reserves. Remember, these life insurers have had that money available. They could've cut those checks years ago, and if they're still sitting in the insurance company coffers, they should still be there. This isn't the type of situation as a bank, as you know, never has its full assets in the bank because they're out on loans and things like that, as well.

With the life insurers, that money should be available in relatively liquid form. And I should add, if I'm, you know, die and come back and have to be an insurance company, I want to be a life insurance company. They've got good profit ratios. They're, in many ways, the easiest type of insurance business to run, because the mortality tables are much more predictable than the hurricane season or things like that. So life insurers should have the financial wherewithal to honor any demands.

GONYEA: That's Jeffrey Stempel of the University of Nevada, Las Vegas.

Prudential Life Insurance issued a statement yesterday, saying, quote, "We firmly believe that our interest-bearing account is a convenient and flexible way for beneficiaries to safeguard and access their money. We fully disclose the nature and terms of the account to accountholders, including the interest credited to the account."

You can read the full responses from Prudential and MetLife at our Web site: npr.org.

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