What is the problem with this arrangement?  For starters, the insurance company typically pays well below market interest rates on the funds.  Also, the money is not kept in an FDIC insured account. Instead, the funds are mingled in the general operating accounts of the insurance company:

"This unregulated quasi-banking system operated by insurers has none of the protections of the actual banking system. Lawrence Baxter, a professor at Duke University School of Law in Durham, North Carolina, says the potential exists for a catastrophe."

The benefit to the insurance company is obvious: it operates as an unofficial bank and is able to profit from the spread consisting of the difference it pays in interest against the returns it gains by investing the money.

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• the unequal bargaining power which would allow unscrupulous insurers to take advantage of their insureds' misfortunes in bargaining for settlement or the resolution of claims;
•  without such a duty, insurers could arbitrarily deny coverage and delay payment of the claim with no more penalty than the interest on the amount owed; and
• an insurance company has the exclusive control over the evaluation, processing and denial of claims.

Unfortunately, the Texas Supreme Court has gradually chipped away at policy holder rights as the insurance industry has gained political power in Austin over the past dozen or so years.  It is important to contact a lawyer if you believe you or your business in Texas are not being dealt with reasonably by an insurance company.

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In a well-reasoned opinion, the Houston federal district court ruled against the insurance company and its attempt to craft a per se rule that driving while intoxicated is never an accident.  Had the insurance company wanted to enforce such an exlusion, it should have explicitly been stated in the policy.

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"Health, life and disability insurers will no longer have blanket authority to decide what their policies do and don't cover in Texas, under rules approved Monday by Insurance Commissioner Mike Geeslin.

The decision, which was sought by the state consumer advocate for insurance, ends long-standing provisions in most health and disability plans – called discretionary clauses – that give insurers the right to interpret their policies and decide what benefits must be paid.

In formally adopting the new rules, Geeslin wrote that the discretionary powers of companies "are unjust, encourage misrepresentation and are deceptive because they mislead consumers regarding the terms of coverage" in their policies.

Prohibiting those provisions, the commissioner said, will protect consumers from "incorrect and unfair coverage determinations by insurers and HMOs without a subsequent opportunity for a full and independent review" of their claims."

This decision by the Texas Insurance Commissioner was long overdue and levels the playing field somewhat between insurance companies and consumers.

In a recent case, however, the Fifth Circuit Court of Appeals overturned a district court's decision upholding Unum Life Insurance Company's denial of benefits. While the decision dealt with disability insurance instead of life insurance, the legal concepts at issue are similar in both contexts.  The Fifth Circuit disagreed with the trial court that Unum had not abused its discretion. The Fifth Circuit appeared troubled that Unum pressured its consulting physician to rule that the claimant was not disabled, even though the physician was not provided with an MRI he had previously deemed important to review.  Furthermore, Unum based its denial on opinions from its own paid physicians that were somewhat vague and certainly less than concrete.

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Generally a life insurance company can rescind a policy purchased within two years of the insured's death if it proves the application contained a misrepresentation.  However, under the Texas Insurance Code, it must be shown that such misrepresentation:

One factor turning this around is the way insurers' core product, whole life, came through the financial crisis. Competing term insurance, priced much lower, was sold on the pitch "Buy term and invest the difference." But when stocks plunged early on in the financial crisis, "invest the difference" sometimes meant "lose the difference." By contrast, money paid for whole life was still there.

Term-life sales were flat in the second half of 2009, according to Limra, while sales of whole-life policies were up 12% from a year earlier.

Whole life, given its complexity, generally isn't sold via the Internet, but needs an agent to explain it. So now the insurers that specialize in whole life are capitalizing on the more positive light in which it is viewed, adding agents.