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Can We Just Focus on the Circular Letter?

When the New York Department of Financial Services Circular Letter 4 (2012) was posted on their website in late February, I had a strong reaction, as did many others. But when I took a step back, I realized that it wasn’t so much the Circular Letter itself, it was the accompanying press release. That release was surprising in both its tone and conclusions. I was not surprised that New York would issue a Circular Letter requiring disclosure around retained asset accounts and rules for their election. Many other states have.

What was surprising to me was the use of emotionally charged statements in the press release such as: “For years, the life insurance industry has been earning hundreds of millions of dollars by holding life insurance payouts of America’s soldiers, veterans and others in so-called ‘retained asset accounts.’” Is this ranked in order of the amount of proceeds held or in the order of emotional appeal? The press release further states: “Even though the money is owed to surviving family members, the insurance companies continue to earn interest on and invest these funds until they are withdrawn by survivors.” That is a true statement, but it seems to suggest that other financial institutions would not benefit if those funds were on deposit there.

All financial institutions make a profit of the funds they hold, don’t they? If a beneficiary of a life insurance policy is issued a lump sum and they deposit those proceeds in a bank account, the suggestion seems to be that the bank doesn’t then make a profit on those funds.

The suggestion by the Department of Financial Services, that now regulates both banks and insurance companies, appears to be that banks are altruistic and insurers opportunistic. Unlike the insurers, banks won’t profit off of life insurance proceeds left on deposit with them. Really? My savings accounts are earning less than 1% interest right now. Am I supposed to believe that the banks are not investing and earning anything above that? They are passing everything through to me? If not, would that be somehow different if the funds sitting in my savings accounts were proceeds from a life insurance policy instead of saved income? If my accounts had been funded with life insurance proceeds, the bank would not “continue to earn interest on and invest these funds” until I withdrew them? The only alternative to a financial institution making a profit on life insurance proceeds seems to be to require that the proceeds be held by the beneficiary in cash – perhaps stuffed in a mattress. If a financial institution is going to profit does it really matter to the individual whether it is a bank or an insurance company?

Now there is the question of FDIC coverage. FDIC does not cover proceeds left on deposit with insurers. I am fine with that being disclosed. But what about state Guaranty Fund coverage? Why is it not equally important, in the name of full disclosure, that insurers be able to compare and contrast what Guaranty Funds cover with what the FDIC provides? Notices are required in some states on policy delivery, but discussion at any other time is generally prohibited unless initiated by the consumer. Full and complete disclosure would seem to argue in favor of changing that position and allowing a discussion of Guaranty Funds whenever FDIC is mentioned.

What seems unfortunate to me is that there would have been little insurer outrage at the content of the Circular Letter itself. It focuses on disclosure and procedures for electing settlement options in lieu of a lump sum and while the requirements are somewhat more onerous than other states, in my opinion, they are not surprisingly so and they require only incremental modifications to what most companies have implemented in other states. Not what companies wanted, particularly so late in the retained asset account game when changes have been made to process and procedure based on what other states already require: but not an insurmountable burden either, I don’t think.

When coupled with such an inflammatory press release, it is hard to avoid a strong emotional response. And emotional responses often lead to resistance and opposition, which I don’t think was necessary to achieve compliance. And that suggests that perhaps the goal of the press release was other than industry compliance.