Where to Stash Your Insurance Benefits

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Bereaved survivors often find themselves swimming in cash from life insurance payouts at an emotional time when they aren't well-suited to handle tricky financial issues.

What’s the best thing to do? Keep the money in the checking account set up by the insurer, or move it? For most survivors, the insurance account is probably fine for the time being, however other savings vehicles, including certificates of deposit, might work better for them in the long run.

This specific issue erupted this summer with the story of a Maryland mother who was displeased with the checking account set up by the insurer who paid her share of a $400,000 death benefit left behind by her son, an Army sergeant killed in Afghanistan. These accounts allow beneficiaries to withdraw all the money at once, or in smaller sums over time.

The soldier’s mother complained retailers refused to accept two checks written on the account, though she had successfully used the checks elsewhere. News stories also questioned the lack of FDIC coverage for such accounts, as well as profits insurers earned on the money.

A variety of regulators are looking into the matter, but so far little has surfaced that should worry other beneficiaries with these “retained-asset accounts.”

As it turns out, the retailer rejected the two checks because they were “drafts” rather than ordinary bank checks. Most money-market funds use drafts, and some retailers won’t accept them because they are not always compatible with the automated processing systems set up for bank checks.

Money-market funds at insurance companies, brokerages and mutual fund companies are not FDIC insured but do have a superb track record for protecting investors’ principal and paying interest as promised. Stories on the insurance checking accounts have not shown that any beneficiary lost money from a lack of FDIC insurance, though the various inquiries are looking into just what disclosures beneficiaries receive. Millions of people are happy with money-markets, which currently hold about $4 trillion in individual and institutional funds.

Insurance companies do make money on the accounts, the same way banks do, by trying to invest deposited sums at a higher return than is paid to depositors.

For beneficiaries, the key issue is interest earnings. News accounts say some of the older life-insurance policies guarantee 3% a year, which is pretty generous by today’s standards. Banks are paying an average of 0.296% in money-market accounts and just 0.116% in interest-bearing checking accounts, according to the BankingMyWay survey. Even the newer insurance-checking accounts do better than that, guaranteeing 0.5%.

But a beneficiary who does not expect to spend the entire insurance benefit quickly and wants absolute safety could turn to an FDIC-insured bank CD. The average five-year CD pays about 1.9%, according to the survey. The search tool shows that some pay as much as 3%.

To keep access to your money while earning as much as possible, consider a laddering strategy that will use an assortment of long- and short-term CDs. The CD Ladder Calculator can help set that up.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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