The Truth Behind the Death-Benefit Payouts

Bloomberg, The Wall Street Journal and others have recently published articles saying how terrible it is that insurance companies are putting death benefits payable to beneficiaries into interest-bearing checking accounts as opposed to paying out the proceeds. This is a terrible misrepresentation of what actually happens and how this works.

Yes, for many companies the automatic settlement is to put the money in an interest-bearing checking account, but if the beneficiaries select a check for the proceeds, it is paid out as soon as the paperwork is processed and approved, sometimes in a matter of days. And in fact, most beneficiaries do request a lump-sum payout. According to Genworth, this number is as high as 90% of the beneficiaries.

As my friend David Woods, former CEO of NAIFA and the LIFE Foundation, states, “These articles charge that the companies are paying 1% and earning 5%. But the reality is that the money is available just as it is in a checking or savings account, right now. There is no checking or savings account in the world paying 5%. Even five-year CDs are in the 2% to 3% range.”

Most beneficiaries, if they take the death-benefit proceeds in a lump-sum check, will deposit them into a checking, money market or savings account, or CD, which at today’s rates, pays very little. Why are they going to do this? Because they need time to heal and make the proper financial decisions. Keeping the funds liquid and available is a most appropriate decision.

To the best of my knowledge, no beneficiaries have lost any of these death-benefit proceeds to financial mismanagement in one of the insurance-company checking accounts, and the beneficiaries can take the money out at any time by writing a check, no strings attached, no surrender charges and no fees. And this is a bad deal?

What do the banks do with the money they hold in deposits? They lend it out or invest it at much higher rates than they pay to their customers on their checking, savings or money market accounts and CDs.

The insurance industry is looking out for the best interests of its clients.