Death benefits flap has advisers on alert

In their attempts to defuse the recent controversy surrounding retained-death-benefit payouts to survivors, insurance industry executives have played up the protection that the accounts provide grieving beneficiaries. In a statement re-leased in late July, Prudential Financial Inc. chief executive John Strangfeld said that the insurance company accounts help safeguard clients' cash. “Beneficiaries are vulnerable targets for abusive sales tactics,” he said. That may be true. But it appears that beneficiaries also may be targeted by the very insurers who hold their death benefit proceeds. Indeed, financial advisers with an insurance background said that captive-insurance agents are often notified when death benefit claims come in. “When the death benefit is made, the [insurer] says, "Go out and contact that client and try to retain the assets,'” said an adviser who once worked for an insurer, and asked not to be identified. “They don't say it that way; they tell you, "When one of your clients dies, you want to work with them and help them to figure out what they need, and to create a plan and sort through the challenges.'” Either way, advisers need to be in the mix. Death benefit payments are often sizable sums, and clients may fail to grasp what retained-asset ac-counts are — or how funds in the accounts are invested. Press reports claiming that insurers are profiting from death benefits have underscored the need for advisers to take a hard look at the accounts. “Advisers will have to work a little harder on where the assets are, and the cost, benefit and risk to clients,” said Thomas J. Duffy, an adviser at Jersey Shore Financial Advisors LLC. Retained-asset accounts are created when a survivor files a death benefit claim. Rather than sending a check for the full amount of the policy, insurers typically send beneficiaries a checkbook. The retained funds are pooled in an insurers' general corporate account, then in-vested. The insurer pays out a portion of the earnings into accounts, pocketing the rest. According to Bloomberg News, Prudential paid some survivors 1% interest on their accounts in 2008, while the insurer earned a 4.8% return on its corporate funds. Rep. Debbie Halvorson, D-Ill., and Sen. Charles Schumer, D-N.Y., have both proposed legislation revamping such accounts for soldiers and federal employees. New York Attorney General Andrew Cuomo has gone further, probing life insurers' practices. For their part, advisers are attempting to clear up clients' misconceptions about the accounts. “For the most part, they're under the impression that it's a bank account or a money market account with a checkbook,” said Ron Palastro, a registered representative at R.S. Palastro Financial Planning Services Inc. But the money in the accounts isn't insured by the Federal Deposit Insurance Corp. It is covered by state guaranty funds, but most states set limits of $300,000 for life insurance death benefits. What's more, the degree of disclosure varies by company. The National Association of Insurance Commissioners has a model rule on retained-asset accounts and their disclosure. To date, just six states have adopted some form of the rule. In its brochure, Prudential states that its retained-asset account isn't a bank account, noting that it adjusts the interest rate earned on the account at its discretion. “We fully disclose the nature and terms of the account to account holders, including the interest credited to their account,” Prudential said in a statement. Individual policyholders at MetLife Inc. may select a Total Control Account or a check as a settlement option, with the TCA being the default choice (subject to state law). “Our materials carefully explain the TCA to our customers so that they understand that they can use their checkbooks to withdraw all of their benefits immediately or over time as they choose,” MetLife said in a statement. But when beneficiaries file a death claim, they may end up hearing from insurance agents, Mr. Palastro said. He pointed out that sometimes the agent who sold the coverage to a client is no longer with the firm. Those beneficiaries then become “orphan leads” within the company — and therefore are available to other agents, who attempt to retain the business. Some carriers have enlisted their agents to reach out to beneficiaries once a death benefit claim has been filed. “Policy owners are encouraged to work with our representatives,” said Jean Towell, a spokeswoman for The Northwestern Mutual Life Insurance Co. ”They play a consultative role.” MetLife has a group of specially trained agents to help beneficiaries file their claims and provide grief counseling. The special agents aren't allowed to pitch any new products for six months when working with beneficiaries, MetLife spokesman John Calagna said. However, if a beneficiary says he or she wants to “make a decision” with the money, the agents can help with that. Paul Graham, chief actuary at the American Council of Life Insurers, said carriers don't intend for the accounts to be long-term options but rather a place where beneficiaries can hold their money for a few months. Nonetheless, three firms that handle retained-asset accounts for about 130 carriers told Bloom-berg that insurers are holding on to at least $28 billion owed to survivors. A number of advisers told InvestmentNews that they recommend that clients pull the money out of the retained-asset accounts in search of higher returns. “My clients never keep it in there very long,” said Lauren Prince, an adviser with Prince Financial Advisory LLC. “They need to generate income from that money.” Other advisers said they have, at times, advised clients to hold on to a retained-asset account. “Sometimes a savings account is paying them less,” said J. Corey Vertich, a principal at Uhler & Vertich Financial Planners LLC. But given the recent flap about the accounts, Bob Beswick, senior life and health adviser at Preisz Associates Inc., said that he might more frequently recommend that clients cash out. E-mail Darla Mercado at -dmercado@investmentnews.com.