Law, Money, & Elder Law: FDIC reviews life insurance retained asset accounts

By Monte M. Korn

Sheila Blair, head of the Federal Deposit Insurance Corp., says her agency is reviewing disclosures life insurance companies sent to their beneficiaries to determine if they mislead consumers about whether the FDIC backs their accounts.

When a policyholder dies, some life insurers put beneficiary funds into interest bearing accounts and send them “checkbooks” that allow them to draw down the funds instead of sending them a single check for the full amount of their death benefit payout.

At least some insurers have both their company’s name and the name of a bank that acts as an intermediary on their checks.

“Public understanding of FDIC insurance and when and how our guarantee applies is of the highest importance to us,” Blair wrote in a letter to the chief executive of the National Association of Insurance Commissioners (NAIC), a group of state regulators.

The letter dated Aug. 5 was posted on the FDIC website. The letter said that based on an initial review of sample documentation from an insurer to a beneficiary, “we believe that consumers may mistakenly conclude” that the insurers accounts were offered by insured depository institutions and were FDIC-insured.

The two largest life insurers by assets, MetLife Inc. and Prudential Financial Inc., currently tell beneficiaries their accounts aren’t FDIC-insured.

Prudential includes the information in a letter to beneficiaries, while MetLife includes it in the first paragraph of its “customer agreement” and in a brochure it send to beneficiaries.

Instead of the $250,000 guarantee that backs FDIC-insured bank accounts, funds in insurers’ retained-asset accounts are backed state insurance guaranty funds. They typically offer protection of $300,000.

New York attorney General Andrew Cuomo is among the officials who have said they are examining the accounts.

Cuomo announced a “major fraud investigation” last month and said insurers are pocketing “secret profits” by paying less in interest than they make by investing the funds.

Insurers targeted by Mr. Cuomo, including MetLife and Prudential, have said the accounts provide a service to grieving beneficiaries who need time before making decisions about what to do with their payouts. The practice of offering the accounts dates back more than two decades.

Rep. Edolphus Towns (D-NY) said this week that the House Oversight and Reform Committee that he leads is investigating the payouts after he learned that Prudential doesn’t automatically deliver a lump-sum check to beneficiaries of deceased soldiers. Prudential runs the government’s life insurance programs for soldiers and veterans.

Material for this article was obtained from Erick Holm’s column, which appeared in the Wall Street Journal on Aug. 13.

Monte M. Korn is an attorney practicing law in West Bloomfield, has been a member of the State Bar of Michigan since 1942, and is a member of the Probate and Elder Law Sections of the State Bar.
Monte Korn is the talk show host of “Open Line with Monte Korn” on radio station WNZK am690 every morning at 11 a.m. He can be reached at (248) 933-4334.
The material in the above article is the research of Monte M. Korn. The Detroit, Oakland County, and Macomb County Legal Newspapers have no responsibility therein.