Insurers hold payouts in general accounts

A Bloomberg story entitled, Fallen Soldiers' Families Denied Cash as Insurers Profit, explores the practice of insurers holding life insurance benefits in their general accounts. Simply put, instead of sending a check to the designated beneficiary for the policy benefit, the insurance company sends the beneficiary a check book.  The beneficiary can then write checks against the funds.

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.

Texas Insurance Coverage Lawyers

J. Michael YoungComment