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Insurers May Face Shift on Life Payouts

Source: WSJ

Posted on 04 Aug 2010

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Insurers may face changes in the way they make payouts on life insurance, said state regulators who are leading a review of now-controversial money-market-like accounts for death benefits.

Currently, some insurers automatically put policy proceeds into so-called retained-asset accounts for some beneficiaries rather than giving them the option of a check for the full amount.

Susan Voss, a senior officer at the National Association of Insurance Commissioners, a group of state regulators, said in an interview Tuesday that consumers should be given an explicit option to receive a death benefit in a lump sum.

"What we understand is that consumers sometimes haven't been given a choice" of getting a check in the mail, said Ms. Voss, who is also Iowa's top insurance regulator. "That's troubling."

Regulators began reviewing the matter in the wake of a report in Bloomberg Markets magazine about the accounts, from which beneficiaries can withdraw the money by writing a check. While the practice is decades old, regulators say they want to make sure consumers aren't confused about their ability to immediately withdraw all the money and move it elsewhere.

Each year, insurers retain billions of dollars in the accounts, generally paying less in interest to the beneficiary than they make by investing the money in securities. The accounts have generally been portrayed as offering a useful option for beneficiaries too bereft to make immediate financial decisions. Most guarantee a minimum interest rate.

Regulators on Tuesday said they are looking at beefing up what insurers must disclose both to consumers and in their annual filings with state insurance departments. On the table is whether they may have to break out as a line item in those filings the amount held in the retained asset accounts.

Regulators are also trying to determine how profitable the accounts are for insurers in the face of criticism including from New York Attorney General Andrew Cuomo, who last week dubbed the accounts a source of "secret" profits. He has subpoenaed eight companies for information about payouts.

The state regulators are also reviewing whether it's appropriate for insurers to attempt to profit from grieving beneficiaries.

One issue, the regulators said, is that if insurers don't have the ability to earn a profit, they may not provide the accounts. That could reduce consumer choice.

Separately, Matthew Gaul, a senior regulator in New York's insurance department, said regulators there are finding "widely varying practices" for disclosure of information to consumers and "when and how companies put people into" the retained-asset accounts. "We're continuing our comprehensive review, but there's clearly a need for more guidance and clearer rules of the road in this area."

New York aims soon to distribute guidance to the industry on best practices for informing consumers, he said.

Jane Cline, the president of the NAIC, predicted the group of regulators could have a "consumer alert" to distribute in two weeks that would emphasize consumers' rights to withdraw the full amounts from the accounts for transfer to other financial institutions if they wish.