The Pros and Cons of a Total Control Account
Learn how a Total Control Account, an insurer-held option for life insurance benefits, differs from a traditional bank account in security and function.
A Total Control Account (TCA) is a financial product offered by insurance companies for paying out life insurance proceeds. Instead of a beneficiary receiving a single check for the full benefit amount, the funds are deposited into an interest-bearing account managed by the insurer. From this account, the beneficiary can withdraw money as needed. This arrangement is designed to provide a beneficiary with time to make financial decisions during a difficult period.
How a Total Control Account Works
Upon the death of a policyholder, the life insurance company establishes a Total Control Account in the beneficiary’s name instead of mailing a lump-sum check. The full death benefit is deposited into this account, which begins to accrue interest. The beneficiary then receives a welcome package that includes a checkbook, referred to as a draft book, and sometimes a payment card to access the funds.
The funds within a TCA are held in the insurance company’s general account and are an obligation of the insurer, not a deposit in a bank. The interest rate is guaranteed to not fall below a certain minimum specified in the account agreement. Interest is calculated and compounded, allowing the funds to grow over time.
Potential Advantages of a Total Control Account
An advantage of a TCA is the “breathing room” it provides to a grieving beneficiary. Receiving a large check can be overwhelming, creating pressure to make immediate financial decisions. A TCA allows the beneficiary to take time to process their loss and consider long-term financial needs, with the funds held securely by the insurer.
The funds held within a Total Control Account earn interest, which may be higher than rates offered by a standard bank savings account. This allows the value of the proceeds to grow while the beneficiary makes plans for the money.
Convenience and immediate access are also features. The account is established automatically by the insurance company, relieving the beneficiary of opening a new bank account during a stressful time. With the provided checkbook or payment card, a beneficiary can easily pay for funeral costs, medical bills, or other urgent expenses.
Potential Disadvantages and Risks
A primary risk of a Total Control Account is the lack of Federal Deposit Insurance Corporation (FDIC) insurance. FDIC insurance protects deposits in member banks up to $250,000 in the event of a bank failure. Because a TCA is an insurance product, the security of the funds depends on the financial solvency of the insurance company itself.
While not federally insured, TCAs are protected by state-level guaranty associations. These associations provide a safety net if an insurance company becomes insolvent. However, the coverage limits vary by state and may be less than the full account balance, and the process for receiving funds can be more complex than an FDIC payout.
Although TCAs earn interest, the rates may not be as competitive as those available through other low-risk financial products. A beneficiary might find that high-yield savings accounts or certificates of deposit (CDs) provide a better return. Over time, this difference in interest rates could result in a significant opportunity cost.
The functionality of a TCA is more limited than that of a standard bank account. Many TCAs lack features such as online bill pay, mobile check deposit, or the ability to execute wire transfers. They also may not integrate with personal finance applications, and some insurers may charge for services like printing new checks.
Alternatives to a Total Control Account
The primary alternative to a Total Control Account is for the beneficiary to receive the full death benefit as a single, lump-sum payment. Beneficiaries are not required to accept a TCA and can request a check for the entire amount from the insurance company. This action places the funds directly under the beneficiary’s control.
Upon receiving the lump-sum payment, the beneficiary can deposit the funds into a bank account that is insured by the FDIC. This step protects the principal up to the $250,000 federal limit. Spreading amounts larger than this across multiple banking institutions can provide full FDIC coverage.
With the funds secured in an insured account, the beneficiary can work with a financial advisor. A professional can help develop a financial plan that aligns with the beneficiary’s long-term goals, whether that involves paying off debt, investing for retirement, or setting aside funds for education.