The New York Department of Financial Services (the “Department”) issued Insurance Circular Letter No. 4 (2012), dated February 24, 2012, which sets forth the practices that all authorized life insurers and fraternal benefit societies should follow in New York with respect to the use of retained asset accounts (“RAAs”) to hold life insurance proceeds for beneficiaries.

RAAs Generally

RAAs have been designed by life insurers to hold the proceeds of life insurance policies after the death of the insured. RAAs were first introduced in the early 1980s. The beneficiary is typically issued drafts which may be used to draw upon all or part of the RAA balance at any time. Interest accrues on the RAA balance. The assets that support the RAA are typically held in the life insurer’s general account, and the life insurer bears the risk of investment losses and generally retains any profits from excess investment returns. Although the balances are not guaranteed by the FDIC, they are generally covered by state life and health insurance guaranty associations.  

Investigations; NCOIL and NAIC RAA Rules

The use of RAAs by life insurers came under investigation in July 2010 by Andrew M. Cuomo, then Attorney General, and now Governor, of New York. The National Association of Insurance Commissioners (“NAIC”) had previously investigated the use of RAAs in 1993 and 1994 and, in 1994, adopted a Retained Asset Account Sample Bulletin setting forth appropriate disclosures for RAAs. The NAIC revisited the Sample Bulletin in 2010 and adopted further amendments to the Sample Bulletin in December 2010. In November 2010, the National Conference of State Insurance Legislators (“NCOIL”) approved a new model act named the “Beneficiaries’ Bill of Rights” to address RAA practices. Both the NCOIL and NAIC are just models; they must be enacted into law or promulgated by regulation in a state to be applicable to insurer activity in the state. Various states have addressed the regulation of RAAs through new laws, new regulations or a bulletin issued by the state insurance regulator.  

New York RAA Rules: Important Differences

While there has been little Department engagement with the life insurance industry regarding RAAs since the 2010 Attorney General investigation, the Circular Letter sets forth considerably stricter and more detailed terms under which authorized life insurers may use RAAs than do the NCOIL and NAIC models. While the New York RAA rules incorporate many of the elements of the NCOIL and NAIC RAA rules, the New York RAA rules differ in the following important ways:  

  • Under the New York RAA rules, a lump sum settlement (single check for death proceeds) is the required default settlement option. Selection of a RAA requires the affirmative selection by a beneficiary.
  • The New York RAA rules require notice of a RAA holder’s right to designate a beneficiary for the RAA.
  • The New York RAA rules impose disclosure obligations to beneficiaries of existing RAAs (right to designate a beneficiary for the RAA and one draft or check may be used to access the entire RAA balance).
  • The New York RAA rules require advance notice to all RAA holders where the interest rate or the formula used for calculating interest is about to change.
  • The New York RAA rules require written notice to beneficiaries for each year of inactivity on an RAA.

The Department expects compliance with the Circular Letter for new beneficiaries beginning April 1, 2012, and for existing beneficiaries no later than October 1, 2012.

Comparison: New York vs. NAIC and NCOIL The attached chart compares the requirements of the New York Circular Letter, the NAIC Sample Bulletin and the NCOIL Beneficiaries’ Bill of Rights with respect to RAAs. Click here to view the chart.