Retained Asset Accounts, also known as RAAs, were created by life insurance companies as an alternative to paying out a lump sum to policyholders.
An RAA is like a pseudo checking account: the proceeds that would have normally been paid out are deposited in the insurance company’s corporate account, and the policyholder can access those funds by writing a check.
Problems policyholders and beneficiaries have with RAAs
Many policyholders and beneficiaries have experienced difficulties with RAAs. First, it is common for policyholders to suffer a significant delay in receiving funds, having drafted a check on the account.
Second, many vendors do not accept RAA checks – perhaps due to problem number one.
Third, the policyholder’s funds are deposited in the insurance company’s corporate account and it is the insurance company, not the policyholder, to whom interest accrues.
Fourth, there is some concern about the general safety of RAA funds. Traditional banks are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000. RAAs are not insured by the FDIC. This means that if the insurance company issuing the policy is not in good financial health and eventually does not have the funds to distribute, no one will pay policyholders the money they are owed.
Some states have insurance guaranty funds available for this purpose, but not all.
What an insurance company gains from RAAs
In short – interest on policyholders’ funds, and the ability to retain the corpus of the account until the policyholder draws it down.
Insurance companies have been known to try to make RAAs more attractive by offering the policyholder a percentage of the interest earned, but insurance companies are still the big winners.
Recent developments on RAAs
In a recent case, Huffman, individually and on behalf of a class, v. The Prudential Insurance Company of America, 2017 WL 6055225 (E.D. Pa. 2017), the court decided that Prudential violated the Employee Retirement Income Security Act of 1974 (ERISA) by automatically depositing life insurance proceeds into RAAs. This means that Prudential, along with other insurance companies that operate in Pennsylvania, will no longer be able to use RAAs as the default method of paying out benefits.
States differ in their treatment of RAAs
Huffman controls in Pennsylvania. Because the insurance industry is regulated on the state level, the treatment of RAAs after Huffman will vary from state to state.
For example, Indiana has no statute or regulation expressly allowing or disallowing RAAs, while Florida allows the use of RAAs though Fla. Stat. Ann. § 627.473[1]:
Any life insurer shall have the power to hold under agreement the proceeds of any policy issued by it, upon such terms and restrictions as to revocation by the policyholder and control by the beneficiaries and with such exemptions from the claims of creditors of beneficiaries other than the policyholder as set forth in the policy or as agreed to in writing by the insurer and the policyholder. Upon maturity of a policy, in the event the policyholder has made no such agreement, the insurer shall have the power to hold the proceeds of the policy under an agreement with the beneficiaries. The insurer shall not be required to segregate the funds so held but may hold them as part of its general assets.
It is likely that Huffman will influence more states to address the validity and legality of various aspects of RAAs.
About the Author: Veronica Baxter is a writer, blogger, and legal assistant located near Philadelphia. She works frequently for Chad G. Boonswang, Esq., a busy Philadelphia life insurance lawyer.
