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Make Sure Life Insurance Benefits Actually Reach Beneficiaries

An investigation by Bloomberg’s Market Magazine (“Fallen Soldiers’ Families Denied Cash as Insurers Profit, 28July10″) has cast new light on an old life insurance industry practice.

Basically, when a claim is filed, the beneficiaries receive something that looks like a checkbook. It’s actually used to request a payout from the insurance company, however, not as an actual negotiable check. The remainder of the money is held “in the account for safekeeping for as long as you like.”

Okay, so, some problems with this practice:

– The money is not held in a secure account guaranteed by the FDIC.
– The money is held in the company’s corporate account where it earns an income for the insurer.
– Interest paid to the actual beneficiaries on that money is often 10 times less than what the insurer is earning.

So, how much potential money are we talking about here? Well, currently there are more than 300 million life insurance policies active in the United States and the industry has $4.6 trillion in assets according to the American Council of Life Insurers.

Life insurance companies insist they’ve had nothing but positive feedback — from grieving families — many the parents of young soldiers killed in battle — who don’t realize until months or years have gone by exactly what is happening. A profit is being made on their loved one’s death benefits.

Most of these same people are not aware that under a 2008 law, recipients of veterans’ death benefits have a year to put the money in a Roth IRA, which will allow them to earn tax-free investment gains for the rest of their lives. The insurance company sure as heck isn’t going to tell them.

(For a detailed account of this situation, please read the Bloomberg article.)

Here’s the bottom line. If you are the recipient of any kind of life insurance benefit, it is critical to consult a lawyer and a financial advisor. That policy made money for the insurer while your loved one was paying premiums. It should not continue to profit the company after his or her death. Make sure that the benefits are handled to the benefit of the beneficiary, not for the further gain of the insurance company.

(Click here to learn more about The Importance of Having Life Insurance for Your Family.)

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