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Investments of Life Insurance Proceeds

Barbara Marquand | guest writer for GoTalkMoney

When a loved one with life insurance dies and you're named a beneficiary on the policy, the insurer typically places the money for you in something called a retained asset account, which comes with drafts -- similar to checks -- which you can use to draw cash from the account.

These accounts have been around for a couple of decades, but recently regulators and consumer advocates have raised questions about whether insurers, who make hundreds of millions of dollars from investment gains on the accounts, provide consumers with enough information about their options. Here are four considerations for retained asset accounts.

1. Take your time to mull investments

Life insurers say they provide retained asset accounts to give you a place to hold your money, a safer option than just mailing a big check at a time when you're dealing with the loss of a loved one. Having the account from the outset means you don't have to rush into opening new accounts or make immediate investment decisions.

2. Not covered by FDIC insurance like money market accounts, CDs and savings accounts.

A retained asset account isn't protected by FDIC insurance if it's held by an insurer. FDIC insurance covers only deposits held by depositories, with a cap of $250,000 per person per financial institution. Retained asset accounts are covered, however, by state life and health guaranty associations, which provide coverage for policies when insurance companies go under. Most state guaranty associations cover up to $300,000 in life insurance death benefits, which would extend to retained asset accounts, according to recent testimony by the National Organization of Life and Health Insurance Guaranty Associations President Peter Gallanis at a meeting of state insurance commissioners. Coverage caps vary by state, so check with your state's guaranty association to learn what the limits are.

Keep the book of drafts you get with the account in a safe place. News reports have pointed out instances when beneficiaries fell victim to fraud because acquaintances stole and forged drafts. In rare instances these consumers were caught in a tough conflicts between the insurer and the bank that processed the drafts.

3. Interest rates

Your money earns interest in a retained asset account. Find out how much, and compare that with other options, such as CDs and money market accounts. In a recent consumer alert, the National Association of Insurance Commissioners advised you to ask how the interest rate is determined and how it will be credited to your account. Insurance companies say their accounts' rates are competitive. Prudential Financial, for instance, says interest it paid on retained asset accounts beat prevailing rates for checking, savings and many money market accounts in the last five years. Do some comparisons on your own.

4. Payout options

State insurance commissioners say to be sure to read and understand all the information the insurer sends you and take your time deciding the right payout option. A variety of options are available, such as taking the money in one lump sum, in installments or receiving interest only and passing the proceeds onto your beneficiaries after you die.

Consider your financial needs and tax status as you mull options, and take your time to decide. You should never feel pressured to act quickly, the National Association of Insurance Commissioners says. If you need help, go to a financial or tax advisor you already know and trust.

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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