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What Are Life Insurance Retained Assets Accounts
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Article 6 of 6 in Life Insurance Claims, Attorneys, and Lawsuits
Many insurance companies and advisers who deal with the bereaved have said that the immediate aftermath of the death of a loved one is a bad time to make financial decisions. Knowing this, most major life insurance companies are enabling beneficiaries receiving life insurance payouts the opportunity to safely defer any decisions on what to do with those proceeds, while at the same time providing immediate access to some or all of the funds via retained assets accounts.
What are Retained Asset Accounts?
A retained assets account can be created at no fee to the beneficiary after a life insurance claim is filed. The account is a special interest bearing account that operates similar to a checking account for beneficiaries of their policies. The proceeds of the death benefit are typically placed into these accounts at the insurance company for the beneficiary. Thus the life insurance benefit funds remain protected by the insurance company, but the beneficiary can have access to cover expenses as needed. If the beneficiary should need to move the money later on down the road, that is possible.
Advantages of Retained Asset Accounts vs. Single Check Option
There are some key advantages to selecting a retained assets account that beneficiaries need to consider:
- With a retained assets account, the beneficiary is usually able to defer financial decisions, and remove the added stress during a difficult time. This enables the beneficiary to have time to decide whether another settlement option would be advisable as well as how the funds should be invested for the long term after he or she has had time to adjust to the death of the family member or friend.
- Payment through a retained assets account is quick. Taking payment via the single check method typically takes quite a long time before the beneficiary can actually use the proceeds to pay bills. With a single insurance company check that is mailed to the beneficiary, the check has to be deposited in a bank and clear the bank before the funds can be accessed. As the size of the check deposited is likely much larger than the balance the depositor customarily maintains, holds of over a week or two or longer are not uncommon. With the checkbook method in a retained assets account the beneficiary can start writing checks to pay bills and get cash immediately, thus there is faster access to the funds, without having to wait for the insurance check to clear.
- With the single check method the beneficiary earns no interest on the proceeds once the check is cut by the insurance company. With the retained assets account, interest immediately starts accruing on the underlying account for the beneficiary.
- Retained assets accounts are typically free, so there is no cost to using one until you are sure about what you want out of the benefit.
TIP: You can still request a single check in the future. A retained assets account does not mean you can't go with a large payout down the road.
Retained Assets Accounts and Interest
Most insurance companies have historically paid interest at rates significantly higher than what is available for similar accounts from most banks on money market, other deposit accounts, or money market mutual funds. Many insurance companies even guarantee the rates they pay will always be equal to or higher than an outside index. You always should ask the insurance company what rate it is paying on the accounts, and check the rate periodically to make sure it is still relatively attractive.
TIPS: You should also make sure that the insurance company is financially strong and check to see that it remains strong. The insurance company's financial strength backs up the funds in your account and all other policy benefits. You can check the company's rating at the Free Advice insurance rating database.
Protection for Retained Assets Accounts
Make sure you ask if the account is FDIC insured. FDIC (Federal Deposit Insurance Corporation) insures any banking account up to $250,000. Therefore, if the death benefit is more than this, break up the payment into different accounts.
Just as with most other things in life, some diversification is usually a wise idea. Folks with large assets generally know not to keep all their assets at any one bank or brokerage firm. Some diversification always makes sense.
How Long Should You Maintain a Retained Assets Account
The length of time someone maintains their life insurance benefit in a retained assets account is a personal choice. A beneficiary is under no obligation to maintain their life insurance payout in a retained assets account and can simply write a check for the full amount and close the account. Most beneficiaries do maintain at least some significant part of the insurance money in the retained assets accounts for at least 6 months to 2 years. Some retained asset accounts have been maintained by beneficiaries for more than 20 years.
As noted earlier the interest rates are often very favorable, the proceeds are backed by the full financial strength of the insurance company (and in many cases further backstopped by the applicable state life insurance guarantee fund), the account is free, and funds are readily accessible when needed.
Greatest Benefit of Retained Asset Account
One of the greatest benefits of retained asset accounts has nothing to do with investments or returns or safety. Retained asset accounts give people time to decide at a very difficult moment in their lives. Repeated studies have shown that people who inherit large sums - through bequests under Wills or from life insurance, just as people who win lotteries - often burn through the money within a few years. The money looks like a large sum and they spend it, often recklessly, give it away to family and charities in an amount detrimental to their own financial security. Sometimes these unwise and inappropriate decisions leave the beneficiary vulnerable or the victim of being swindled out of large sums of money.
Retained assets accounts help people mentally separate their life insurance proceeds from everyday money and thereby protect themselves for the long haul. If you have any additional questions, ask an experienced life insurance professional for assistance. As you manage the life insurance payout of a deceased friend or family member, don't be afraid to consult an estate planning attorney if you need assistance with the end of life expenses and financial management.
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