Life insurance benefits: This way, you write the check

Instead of handing over a lump sum, many companies now settle claims with a checkbook.

By Dennis Murray
Senior Editor

It's not every day that you open your mailbox and find a checkbook linked to a six-figure account, but that's what happened recently to a middle-age woman whose husband died unexpectedly.

The checkbook, tied to the death benefit on her spouse's life insurance policy, reflects a growing trend in how beneficiaries are paid. Retained-asset accounts, as they're known in the industry, aren't new—MetLife pioneered the concept in 1984—but they're becoming much more common. Some insurers even send checkbooks in lieu of lump-sum payouts for distributions as small as $5,000.

Although insurers say these retained-asset accounts aren't intended to be long-term depositories, beneficiaries leave as much as 15 percent of the money on deposit for at least a year. These accounts currently hold billions of dollars, earning insurers millions in profit each year.

Insurers also may like these accounts because they make it easier for the companies to pitch their investment products—usually annuities and load mutual funds. "They aren't stupid," says Kathleen Stepp, of Stepp & Rothwell, a financial-planning firm in Overland Park, KS. "They know that once the money leaves, it's probably not going to come back." The beneficiary may find better investments elsewhere, though.

Insurers are making the checkbook option tough to sidestep. Indeed, one proof-of-death form we examined requires any beneficiary who doesn't want the checkbook to cross out the section that calls for it and attach a request for "some other method of payment available under the policy."

Is that what you should do if you're offered a life insurance settlement in the checkbook format? Not necessarily. These accounts can provide a convenient place to park a payment for a few weeks or months. They pay an interest rate roughly equivalent to that of a money-market fund—about 3.4 percent these days—and they generally guarantee the safety of both the principal and earnings. Many insurers also offer banking services with checkbook accounts, such as automated-teller transactions and debit cards.

After a few weeks, however, any advantages of the checkbook account begin to fade. If you're investing for the long term, think twice about leaving a significant sum in any account that pays only money-market rates. You'll likely do much better with a diversified basket of stocks, bonds, and mutual funds.

Another reason not to keep these accounts long-term: If the insurer becomes insolvent, the retained assets could remain tied up in litigation for years, and ultimately you might not get all of them. Jack Dolan, a spokesperson for the American Council of Life Insurers, says this could affect death benefits in the high six figures, because your state's guaranty fund might not cover the full amount.

The good news is that closing a retained-asset account is easy: All you have to do is write a check to yourself for the account's full balance.

 

Dennis Murray. Life insurance benefits: This way you write the check. Medical Economics 2001;15:115.