When someone who has named you as their beneficiary dies, you probably expect their life insurance company to collect the proper documents and send you a check – and that’s how things always used to work.
Today, however, life insurance companies like to use what’s known as a retained asset account (RAA) instead. While the insurance industry likes to say that RAAs offer a lot of advantages to the average beneficiary, such as a secure place to hold their funds until they decide how to use them, there are a lot of concerns about this practice.
How do RAAs work?
Instead of issuing a lump-sum payment, the insurance company places the life insurance proceeds in an interest-bearing account. Typically, the insurer will then send the beneficiary what looks like a checkbook that they can use to take drafts on the account – subject to certain rules (usually a minimum dollar amount on each draft). In essence, this sets the insurance company up as the “bank” for the beneficiary’s funds until those funds are depleted.
Why is this a bad thing?
RAAs are not insured by the Federal Deposit Insurance Corporation (FDIC) in case of a default. Insurers say this is not really a problem because insurance companies are historically more stable than banks, and state guaranty systems cover as much or more than the amount covered in an account by the FDIC.
This conveniently ignores the fact that consumers with large RAAs could use several FDIC-insured accounts to protect their monies. It also overlooks the fact that the insurance company doesn’t really set the beneficiary’s money aside. Instead, it continues to use those funds to make investments and loans, generating far more money for its own pockets than the interest given to the beneficiaries – sometimes as much as ten times more than what it pays to the families of the deceased.
Finally, many beneficiaries aren’t aware that the “checks” they get to make drafts aren’t really checks, and they may find it harder than they realize to access their money when they need it.
Sometimes it’s very difficult to realize just how clever big companies can be when they decide to take advantage of someone. Class action lawsuits can help ordinary people fight back against corporate greed.