Checks and Balances

By Tammy Flanagan

August 6, 2010

A recent story by David Evans of Bloomberg Markets magazine, "Fallen Soldiers' Families Denied Cash as Insurers Profit," has drawn a lot of attention. It described what are known in the insurance industry as "retained-asset accounts," in which benefits are paid not as a lump sum, but held in an account from which beneficiaries can withdraw funds using what appear to be checks. Millions of Americans, including some survivors of military service members killed in action, have received insurance benefits in the form of such checkbooks. But the checks actually are drafts and cannot be used in the same way as a bank check. And the funds in the accounts are not protected by the Federal Deposit Insurance Corporation. The insurance company controls the money in the account until the beneficiary withdraws the full amount of the insurance. This allows the company to continue to invest the proceeds, generally at a larger profit than what is being paid on the draft account.

This practice is not new. Benefits under the Federal Employees Group Life Insurance program have been paid in this manner for years. I have a 1998 FEGLI brochure that includes the following information:

Your beneficiary (ies) or other survivors will receive a check for death benefits if the payment is less than $7,500. For payments of $7,500 or more, the Office of the Federal Employees' Group Life Insurance will open a money market account automatically in the name of the payee(s) and will mail a checkbook to the payee(s). The payee(s) may close the account immediately, or write checks for any amount from $250 up to the entire balance in the account at any time. There is no charge for checks, and the account balance earns interest from the day it is opened.

According to the current FEGLI Handbook the threshold for automatic cash payments is now $5,000.

The Office of Personnel Management's FEGLI website says each account set up to deliver benefits under the program functions "like a regular money market account with a checkbook, [and] earns interest from the day it is opened." The words "checkbook" and "money market" could lead participants to believe their money is held in a bank account. There's no explanation that the money is not actually in a bank and the checks cannot be used at retail outlets, but must be cashed by a financial institution.

Better Investments

I can remember hearing about this practice when it began. The reason given for using this approach was to make it easier for grieving family members or other beneficiaries to decide what to do with the money they would receive. The money would stay safe and invested until a decision could be reached about appropriate use of the proceeds. My friend, Anne, was widowed in 2002 and received the benefits of her late husband's FEGLI policy in the form of a checkbook. She took one of the checks and wrote it for the entire amount of the insurance, then wisely invested the proceeds with a financial planner's help. Anne quickly determined she could get a better rate of return by investing the money, rather than leaving it in a money market account. Such accounts currently deliver about a 1 percent to 2 percent return.

Now, New York Attorney General Andrew Cuomo says his office is looking into the use of retained-asset accounts. This issue was brought to my attention by a reader, who said: "We were not thrilled to hear this story today regarding the challenges of collecting on life insurance policies, and it appears that this bad news of misleading information also applies to our federal employees' life insurance plans. Seems this deserves and needs your expert touch and interfacing with officials at OPM to get this fixed."

Thanks for the vote of confidence, but the best I can do is draw attention to the issue by writing about it. I would suggest contacting your elected officials if you are concerned about this practice. And if any officials happen to be reading, I polled my retirement seminar participants during the past week to see whether they would prefer to receive insurance payments in a lump-sum payment or via a checkbook. I think most actually would rather have a third choice -- a suitcase full of $100 dollar bills -- but overwhelmingly, they said they preferred the lump-sum option.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on or on WFED AM 1500 in the Washington metro area.

By Tammy Flanagan

August 6, 2010