What Is a Retained Asset Account?
Understand retained asset accounts: how insurance companies manage beneficiary funds and what you need to know about this financial arrangement.
A retained asset account is a financial mechanism offered by insurance companies, typically to beneficiaries of life insurance policies or settlements. It serves as an alternative to receiving a lump-sum payout, allowing beneficiaries to access funds gradually while the remaining balance continues to be held by the insurer. Understanding their function and protections is important for beneficiaries navigating financial decisions during a challenging time.
Understanding Retained Asset Accounts
A retained asset account (RAA) is a contractual agreement where an insurance company holds the proceeds of a life insurance policy, rather than disbursing them as a single payment. These accounts were developed to provide beneficiaries with time to make financial decisions. The primary purpose for the insurance company is to retain and utilize these funds in their general operations, while for the beneficiary, it offers convenience and continued access.
The funds held within an RAA are not deposited into a separate bank account dedicated solely to the beneficiary. Instead, they remain part of the insurance company’s general assets. This arrangement allows the insurer to invest the funds and earn returns. The beneficiary, in turn, receives interest payments on the balance held in the account.
How Retained Asset Accounts Operate
Beneficiaries interact with a retained asset account through a checkbook or debit card provided by the insurance company. This system allows for convenient access to the funds, similar to a traditional checking account, enabling beneficiaries to write drafts against the balance. Withdrawals can be made as needed, providing flexibility for ongoing expenses or larger purchases.
The balance held in the account earns interest, which is determined and set by the insurance company. While this interest rate can fluctuate, it is guaranteed not to fall below a certain minimum. Insurers earn a higher rate on their investments than they pay out, with the difference, or “spread.” Beneficiaries can withdraw the entire remaining balance at any time.
Security and Oversight of Retained Asset Accounts
Retained asset accounts are not insured by the Federal Deposit Insurance Corporation (FDIC). This is because RAAs are products of insurance companies, not traditional bank accounts. The security of the funds in a retained asset account relies directly on the financial strength and solvency of the issuing insurance company.
To provide a safety net for policyholders, state insurance guarantee associations exist. These associations offer protection up to certain limits if an insurance company becomes insolvent. Coverage limits vary by state, but most provide protection for life insurance death benefits. This state-level protection differs from federal FDIC insurance, which covers bank deposits.
State departments of insurance regulate insurance companies, monitoring their financial stability. These regulatory bodies aim to ensure that insurers maintain sufficient reserves to meet their obligations, including those related to retained asset accounts. Regulatory guidelines require clear disclosure to beneficiaries about the nature of these accounts, including their non-FDIC insured status and the applicable state guarantee fund protections.