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Executive Summary

Introduction

In 1984, a new life insurance settlement option, retained asset accounts (RAAs), was introduced. The RAA allows insurers to retain life insurance proceeds and utilize these funds in their operations (Lauria, 1997). With the use of an RAA, the insurer retains the death benefit proceeds in its general account for the benefit of the beneficiary and compensates the beneficiary for the use of the funds through the payment of interest (�Ӱ���Ƶ, 2010a).

From their inception in 1984 until 2010, RAAs were promoted as “very simple and very powerful” and praised by leading financial columnists and consumer advocates as a way to help life insurance beneficiaries protect their assets (Goldsholle and Price, 1996). According to Goldsholle and Price (1996), they were also consistent with the recommendation of grief counselors to avoid making financial decisions immediately following the death of a loved one.

However, in 2010, the RAA came under scrutiny by the press and consumer advocate groups (Evans, 2010). Words such as “shocked,” “betrayal,” and “bad faith” were used in the same sentence when discussing RAAs (Evans, 2010). In dispute was the perception that the beneficiaries did not have access to the funds in the account, the interest rate paid to beneficiaries was insufficient, and that these accounts preyed on beneficiaries at a weak point in their lives—after the death of a loved one (Evans, 2010). As a result, several inquiries were conducted, and committees were formed to analyze RAAs. The �Ӱ���Ƶ (�Ӱ���Ƶ) and the National Conference of Insurance Legislators (NCOIL) issued proposed regulations to address the growing controversy over the use of RAAs (Rothman, 2010). In addition, the �Ӱ���Ƶ issued a consumer alert detailing specific aspects of the RAAs, specifically, that the funds held in RAAs can be withdrawn at any point by the beneficiary (�Ӱ���Ƶ, 2010a).

To assist beneficiaries in their understanding of RAAs, in 2010, the �Ӱ���Ƶ issued a bulletin to establish standards regarding the payment of life insurance benefits through an RAA. The bulletin indicates that the insurer will provide three things to the beneficiary. First, the insurer will provide the beneficiary, at the time a claim is made, with a written notification describing the settlement options available under the policy and how to obtain details regarding these. Second, if utilizing the RAA, the insurer will provide the beneficiary with a supplemental contract that clearly discusses the rights of the beneficiary and obligations of the insurer. Third, if utilizing the RAA, the insurer will provide a written disclosure, no later than when the account is established. This disclosure will provide details to the beneficiary regarding the RAA including how they work, how to access the funds, fees charged and interest paid, and the fact that the RAA is not covered by the Federal Deposit Insurance Corporation (FDIC), as well as other aspects of the account (�Ӱ���Ƶ, 2010b).

With the controversy related to RAAs and the interest in informing consumers, it is important to note that the disclosure to consumers is only required when the claim is first made, which is during the period following the death of a loved one when most feel that financial decisions should not be made. Given the potential emotional state of the account holder at the time the account is established, the risks associated with RAAs (no FDIC protection, limited guaranty fund protections), and to ensure that beneficiaries are clear on the RAA details, we suggest that the disclosure be provided to these account holders no less than annually for as long as funds remain in the account.

In support of the annual disclosure, our analysis will show that over a 12-year period, a higher percentage of RAAs remain open after issuance and that RAA holders have increased the percentage of funds they maintain in the open accounts. The increased retention of RAAs may indicate that the holders are unaware of the risks associated with these accounts or that they find the value of the accounts exceeds the risks. To err on the side of caution and to ensure that account holders are sufficiently informed, it is recommended the annual disclosure be implemented as soon as reasonable. Note that the recommended disclosure is intended to further educate the account holders without recommending further education to all life insurance beneficiaries.

This study is organized as follows: First, we provide a history of RAAs and discuss the details of how they operate. We then discuss the current status of RAAs including their prevalence and the level of funds held by insurers utilizing RAAs. Following this discussion, we outline the existing disclosures and make recommendations to more adequately ensure consumer/beneficiary education. Finally, we offer a conclusion. 

The History and Operation of Retained Asset Accounts

A retained asset account (RAA) is a generic name for an account established by a life insurer representing the insurer's obligation to a beneficiary for the proceeds of a life insurance policy (NOLHGA, 2011).2 MetLife created RAAs in 1984 in response to research conducted with insurers and beneficiaries (Lauria, 1997).3 This research showed that beneficiaries wanted four things: 1) to keep their money safe; 2) to earn a competitive rate of return; 3) to be in control of their money; and 4) to defer decisions at a very emotional and vulnerable time in their lives (Goldsholle and Price, 1996).

Funds deposited in an RAA are held in the general account of the insurer (as opposed to a separate account), leaving them subject to the financial strength and claims-paying ability of the insurer. More importantly, the proceeds are subject to the creditors of the insurer (Evans, 2010).4 In addition, RAAs are not protected by the Federal Deposit Insurance Corporation (FDIC) and have limited protection through the guaranty fund established by the state of residence of the insured at the time of death (NOLHGA, 2011).5 Thus, RAAs have infused additional risk into the life insurance settlement process for the beneficiary.

RAAs are sometimes compared to checkbooks; however, there are distinct differences. Normally, in the case of RAAs, the insurer arranges through a bank to issue a draft book with writing privileges, and through this account, the beneficiary can request a portion of the funds or the full balance at the beneficiary's sole discretion (NOLHGA, 2011). The drafts written on RAAs cannot be used as regular checks (Evans, 2010). For instance, they cannot be used to pay bills or purchase merchandise. Instead, upon receiving the draft, the issuing bank will request funds from the insurer, and the funds will then be transferred to the bank for disbursement to the beneficiary or, when possible based on the rules of the draft account, to the payee listed on the draft (NOLHGA, 2011). These multiple steps can cause a delay in the disbursement of funds and limit the use of the account, as compared to a bank checking account.6 Another difference is that once the account is established, the only funds that can be added to the account are interest earned and additional life insurance proceeds. Otherwise, no additional funds can be deposited (Lauria, 1997).7

Initially, the RAA was one of several settlement options from which the beneficiary could select.8 By 1997, RAAs became the default life insurance settlement option for nearly all life insurance companies that offered them (Lauria, 1997). In 1997, 175 life insurers utilized RAAs, and these companies opened over 1.5 million accounts involving over $50 billion (Lauria, 1997). 

In 2010, several news articles presented negative commentary on the use of RAAs for military beneficiaries (Evans, 2010; Sturdevant, 2010; Weston and Willey, 2016). As a result of this negative publicity, the Department of Veterans Affairs (VA), the FDIC, and the �Ӱ���Ƶ investigated the use of RAAs and the disclosures utilized by life insurers. Model legislation and disclosures were created and sent to insurers (Evans, 2010; Holm, 2010; Sturdevant, 2010). The controversy and subsequent changes to the reporting of RAAs appear to have impacted their utilization by insurers and through these changes, an analysis of the use of these accounts over time can now be done. 

The Current Status of Retained Asset Accounts

Following the controversy in 2010, the statutory annual statement was updated to require the reporting of specific information related to the RAAs.9 As a result of this change, an analysis of the trends in the number and funds held in RAAs is possible. Therefore, we analyze the data provided on the statutory annual statements for U.S. life insurers from 2010 to 2022.

RAAs are a significant part of the life insurance market (Bisco and McCullough, 2017). In 2010, 18.03 percent of life insurers in the U.S. (141 of the 782 insurers) offered RAAs. Table 1 shows the summary of the utilization of RAAs for each year under review. As can be seen, the percentage of life insurers utilizing RAAs has remained steady at around 20 percent, however, the total number of accounts has decreased year over year from a high of nearly 1.05 million in 2010 to just over 613,000 in 2022. Even with this drop in the number of accounts, the level of total assets in these accounts remains strong at over $27.5 billion in 2022. The average amount held in an RAA has increased from $29,636 in 2010 to $44,904 in 2022.10 Even though the number of RAAs has dropped over the years, this does not diminish the necessity to ensure that the account holders are sufficiently informed about the risks associated with these accounts. 

In the early years of the RAA, it was one of many settlement options available to beneficiaries. By 1985, some companies had started to make the RAA the default settlement option for life insurance proceeds (Goldsholle and Price, 1996). As previously stated, by 1997, the RAA was the default option for the majority of life insurers that offered them (Lauria, 1997).11 Even with the increased use of RAAs as the default method, the cash (lump sum) option remained the most common settlement option for life insurance proceeds (Rejda and McNamara, 2014). 

Over the years, the use of RAAs as the default settlement option has varied. By the end of 2010, 57.45 percent of the insurers offering RAAs elected to make them their default settlement method for life insurance proceeds. This decreased to a low of 34.87 percent in 2016. In 2022, this number had increased to almost 40.91 percent. Table 2 shows the number and percentage of insurers electing to make the RAA the default settlement option when permissible by law. 

RAAs create a significant money management opportunity for an insurance company because many beneficiaries do not immediately write a draft for the full death benefit (Belth 2010).12 As previously indicated, the life insurer retains the death benefit proceeds deposited into an RAA in its general account for the benefit of the beneficiary and compensates the beneficiary for the use of the funds through the payment of interest (�Ӱ���Ƶ, 2010a). Retaining the proceeds in the general account permits the insurer to utilize the funds in its operations and adds additional risk to the beneficiary (Bisco and McCullough, 2017). According to Goldsholle and Price (1996), in a well-functioning RAA, few beneficiaries will withdraw all their money from the account; rather, they will keep their accounts open for some time.13

Table 3 and Table 4 show the retention of these accounts. Table 3 shows the retention of the accounts over time. The year indicates the year the accounts were opened, and the percentage indicates the percentage of the accounts open at the end of the designated timeframe. For instance, for all RAA accounts opened in 2010, 56.66 percent remained open at the end of 2010, while 21.41 percent remained open at the end of the fifth year (2014). From this table, it is clear that the retention of accounts remains fairly steady for each year in the study and throughout the time the accounts remain open.  

The disclosure indicated in No. 3 is to provide at least the following information: the payment of the full benefit is accomplished by issuance of the check/draft book, which of these is being issued, and an explanation of how the account works; the beneficiary can withdraw all funds, including interest earned, at any time; whether the other settlement options are preserved until the full amount of the RAA is withdrawn or falls below some specified amount; and information about the account services provided and, if some are offered, how to obtain these services. The insurer must also indicate any fees that may be charged as well as the frequency of any statements that the beneficiary will receive. Regarding interest, the insurer must indicate any minimum interest rate to be credited and how the actual interest rate will be determined. They must further explain that interest on an RAA is taxable. The insurer must indicate its policy regarding an RAA that becomes inactive. Finally, the insurer must include in the disclosure the fact that funds held in the RAA are not protected by the FDIC; however, they may have some protection through the state guaranty association (�Ӱ���Ƶ, 2010b).

The guidance provided and the information recommended for the disclosure appears to be quite extensive. However, given the prevalence of RAAs and the significant amount of funds held within these accounts, some of which remain for four or more years, as well as the added risk of these accounts (i.e., no FDIC protection, limited protection from the guaranty fund), it would seem prudent to provide a disclosure beyond this first initial notice. In fact, one of the reasons for the development of the RAA was that beneficiaries wanted to defer financial decisions at what is most likely a very emotional and vulnerable time in their lives (Goldsholle and Price 1996). However, it is during this time that the disclosure is provided and possibly overlooked. Therefore, given the potential emotional state of the beneficiary at the time the account is established, the potential risks associated with RAAs and to ensure that beneficiaries are consistently informed on the details regarding the RAA, we suggest that the disclosure be provided to these account holders no less than annually for as long as funds remain in the accounts. Only through additional disclosures can we ensure that the account holder understands the nuances of this unique settlement option. 

Conclusion

RAAs were created to alleviate the burden of beneficiaries in making financial decisions at a time of considerable grief (Goldsholle and Price, 1996). Even though they were created in 1984 by MetLife (Lauria, 1997), negative press in 2010 revealed that many life beneficiaries did not fully understand how these accounts worked, and any information they had received regarding the account was ignored or not understood. To address this issue, the �Ӱ���Ƶ provided a consumer alert and a revised bulletin to better educate account holders. 

We have shown that the use of RAAs has remained strong. Accounts continue to be opened, and life insurance proceeds continue to be deposited into these accounts. In 2022, there were over 600,000 accounts with over $27.5 billion in total assets. In addition, although beneficiaries do withdraw approximately 50 percent of the funds in the same year the account is open, we have shown that 20-25 percent of the funds remain after the second full year, and after four full years, around 15 percent of the funds remain in the RAAs. This indicates that the relationship between the life insurer issuing the RAA account and the beneficiary is long. 

To best serve the RAA account holders and ensure that they are informed about the nuances of the accounts, we recommend that a disclosure be sent to the beneficiaries at least annually. Providing additional disclosures beyond the initial disclosure given at account establishment will allow the beneficiary time to grieve and more fully address the purpose of these accounts. It will also allow for informed financial decisions following the death of a loved one. 

Footnotes

[1] The authors wish to thank the audience at Great Lakes Academy of Legal Studies in Business 2022 conference for valuable comments.

Jill Bisco, Illinois State University, The Katie School of Insurance and Risk Management, State Farm Hall of Business, Normal, IL, USA; Suzanne Gradisher, The University of Akron, College of Business, Akron, OH, USA

[2] Life insurance proceeds refer to the death benefit paid out by a life insurance policy to the designated beneficiary(s) upon the death of the insured person(s). These proceeds are typically used to provide financial support to the beneficiaries.

[3] RAAs are known by various names. MetLife introduced its account as the “Total Control Account” (Lauria, 1997), and Pruco Life Insurance Company calls its accounts “Alliance Accounts” (per the notes in the company’s 2022 Statutory Annual Financial Statement).

[4] This differs from separate accounts, which are separate from the general account and, therefore, may be protected from claims by creditors and other insureds (IRMI, 2024).

[5] The guaranty fund offered through a state-sponsored guaranty association does not provide the same type of coverage as the FDIC does, nor does it have the same amount of funds available to it. Guaranty funds generally rely on funds from non-failing insurance companies to fund policies at the time of an insurer’s failure, whereas the FDIC relies on a “war chest” made up of annual payments from banks (Barrese, 2012). In most states, the insured of a life insurance policy is protected by the guaranty fund for up to $300,000 in death benefits (Brewer III, Monschean, and Strahan, 1997). The guaranty fund provides the owners of RAAs protection under the fund; however, there are some unique limitations applicable. If a single RAA is established for a single beneficiary, the maximum coverage provided by the guaranty fund is the maximum per-insured limit established by the state of residence of the insured at the time of death (NOLHGA, 2011). If more than one RAA is established to pay the proceeds of one or more life insurance policies for a single individual, the maximum amount of coverage for all the RAAs will equal the maximum per-insured limit established by the state of residence of the insured at the time of death. Each RAA is only guaranteed up to the percentage of its value relative to the maximum amount of coverage permitted by the state (NOLHGA, 2011). Note that coverage is not provided on a per-policy basis.

[6] The delay in access to the funds experienced by the RAA owner will vary based on several factors, such as whether the insurer deposits funds (for the purpose of paying out RAA drafts) at the institution that accepts the drafts. With the advances in electronic reporting and banking, this delay may be virtually imperceptible to the account owners.

[7] Insurers are not permitted to accept additional deposits into RAAs because they are not licensed as depository institutions (Nordman, 2013).

[8] Other settlement options available to beneficiaries and common in life insurance include cash lump sum, interest only, and life options.

[9] Information on RAAs is generally found in the Notes to Financials, 21, Other Items, of the statutory annual statement of life insurers.

[10] According to the U.S. Bureau of Labor Statistics, in 2022, the average annual wage in the U.S. was $77,643 (Statista, 2024). This number can vary based on factors such as industry, location, and individual qualifications. However, this would indicate that the average held in an RAA is 57.8% of the average individual annual wage in the U.S.

[11] Life insurance is regulated at the state level, and therefore, how states regulate default settlement options for proceeds will vary. Some states may require that the default option be indicated in the contract while others may simply require that the insured be notified of such determination at the time the claim is made or, in some states, the insurer may have to offer a lump sum payment unless another option is selected by the beneficiary(s) (Bisco and McCullough, 2017). 

[12] This creates a unique opportunity for life insurers to obtain capital without significant effort and without expending search and acquisition costs.

[13] By “well-functioning,” Goldsholle and Price (1996) indicate in such an account, most beneficiaries will leave their account open for a period of time and that few drafts will be written at the start of the account.

[14] The data for Table 5 were taken from information shown in the Notes to Financials in the statutory annual statements. Insurers differ in how they report interest paid on RAAs, and therefore, only the highest and lowest rate indicated is captured for this study.

[15] A copy of the consumer alert issued by the �Ӱ���Ƶ in 2010 can be found as Appendix A.