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Thursday, October 11, 2012

Article Recommending Certain Changes To Life Insurance Policy Disclosures

Images-20Michael A. Barrese (University of Connecticut School of Law, J.D. 2012) recently published his article entitled Not in the Fine Print: Recommended Changes to Life Insurance Policy Disclosures Regarding Retained Asset Accounts, 18 Conn. Ins. L.J. 533 (2012).  The introduction to the article is below:  

Tom is the primary breadwinner of his family. In order to protect his wife and children financially in the event that he passes away, he goes online and researches life insurance policies. After becoming familiar with the different forms of life insurance, Tom purchases a $250,000 life insurance policy from a large insurance company. When he purchases the policy, he makes his wife, Melissa, the primary beneficiary. Under the policy, in the event that Tom dies, Melissa is entitled to a lump-sum $250,000 payment.
Six months after purchasing the policy Tom dies in a car accident. Melissa, as beneficiary, is entitled to a lump sum $250,000 payment per the terms of the policy. In the past, this would have been no problem, the insurance company would merely write the $250,000 check to Melissa. However, in 1984, something changed.  Some large insurance companies rolled out a new form of payment, the Retained Asset Account.
Retained Asset Accounts (“RAAs”) are created when life insurance carriers provide the beneficiary of a life insurance policy with a pseudo-checkbook instead of a single lump sum check. Instead of being paid out with a check for the entire amount of the life insurance policy, the proceeds are placed into the insurer's general corporate account from which the beneficiary can draft funds with the use of the pseudo-checkbook.
Because of this change, Melissa does not receive a lump-sum payment; rather she receives a pseudo-checkbook from the insurance company that appears to be drawn from Bank A. Confused by this, Melissa reads the policy disclosure and learns that this pseudo-checkbook entitles her to write checks against the Retained Asset Account up to the value of the insurance policy. With this knowledge, Melissa realizes that she has some options. She can write a pseudo-check for the full amount of the policy and deposit it into her own bank account or she can leave the funds, in whole or in part, in the Retained Asset Account until she has an immediate need for them.
As it turns out, the insurance company has not deposited any of Melissa's funds into an account at Bank A. Instead, the funds were deposited in the insurance company's corporate account at Bank C. When Melissa attempts to deposit a pseudo-check at her bank, Bank B, there is a delay. The delay is caused by the clearing process that the pseudo-check has to go through in order to be deposited. Instead of Bank B drawing the funds directly from Bank A, Bank B must go to the insurance company who then requests the release of funds from Bank C to Bank B. At the end of the day, Melissa still gets the money she is owed, it just takes longer than it would have if she had received an ordinary check for the full amount of the policy from the start.
The practice of providing Retained Asset Accounts in lieu of a lump-sum check was critically described in the article “Fallen Soldiers' Families Denied Cash as Insurers Profit,” by Bloomberg journalist, David Evans. The issue made its way into other media outlets and eventually lawsuits were filed in Federal District Court regarding the policy disclosures and administration of the Retained Asset Accounts.
This note expands upon the discussion in the mainstream media by presenting a description of both benefits and criticisms of Retained Asset Accounts as well as recommendations for changes to policy disclosures that would improve the image of this type of account. In Section II, the paper discusses the benefits and criticisms of Retained Asset Accounts. In Section III, disclosure issues are identified and solutions are presented. The note concludes that there are benefits to both the beneficiaries and to the insurance companies but there are also components of Retained Asset Accounts that are questionable and need to change. Because of these questionable components of Retained Asset Accounts, it would be wise for insurance companies to improve their disclosure statements regarding Retained Asset Accounts in order to avoid both bad publicity and potential litigation. 

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