Beneficiaries Can Bank Proceeds, Bypass Life Insurer Accounts

According to Bloomberg.com, some beneficiaries could vastly benefit by banking their proceeds instead of using a life insurer account. As the article explains, many of consumers are confused by ads that convince beneficiaries they cannot make investment choices on their own.

Policyholders may assume when buying life insurance that beneficiaries will get the payouts in a single bank check. That may not be the case, Bloomberg Markets magazine reports in its September issue. Insurance companies such as Prudential Financial Inc. profit by holding onto the money in their own accounts and issuing checkbooks, essentially IOUs, for survivors to access their money.

“The language they use at the time is all couched in reassuring phrases -- let me give you the security of not having to make an investment choice,” said Lawrence Baxter, professor of the practice of law at Duke University School of Law in Durham, North Carolina. “It leverages off of that state of emotional distress.”

After a loved one passes away, survivors must file a claim and provide a death certificate, according to Bob Hunter, director of insurance for the Consumer Federation of America in Washington. The insurer will then contact the beneficiaries with options for payment, which usually include keeping the money in an account with the insurance company, Baxter said.

“It’s very easy for trusted companies to mislead naïve customers, and life insurance companies are trusted,” said Daniel Kahneman, a professor of psychology and public affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University and a Nobel Prize winner. “The fact that they seem to be outside the regulatory reach is shocking.”

Continue reading at Bloomberg.com…

New Tax Proposals Target Life Insurers

According to the Wall Street Journal, President Obama is hoping to generate over $12 billion in federal revenue from new taxes on life insurers. “The provisions in the Treasury Department tax plan released last week would restrict several products that have drawn attention from regulators in recent years because of the way they use life-insurance policies as vehicles for minimizing taxes on investments.”

The proposals would restrict several tax breaks received by purchasers of insurance or insurance companies themselves, and also require more information reporting in some cases. Industry representatives say the changes would hit sales in at least one significant area of the business, corporate-owned life insurance.

Several industry trade groups, including the American Council of Life Insurers and the Association for Advanced Life Underwriting, wrote last week to leading lawmakers, expressing opposition to the proposals. "Especially during a financial and economic downturn, increasing taxes on products and on an industry that encourages American consumers and businesses to plan for the future and effectively manage risk is unwise public policy," they said.

Insurance industry representatives also argue that now is a bad time to seek more taxes from the industry, given companies' recent losses on investments. The Treasury has given several big life insurers, such as Hartford Financial Services Group Inc. and Lincoln National Corp., preliminary approval to receive billions in federal aid.

A Treasury official said the tax proposals are unrelated to the federal capital infusions, adding that the insurers applied for that money months ago. The proposed tax changes generally would take effect in 2010 or 2011.

The official said the proposals are aimed at restoring fairness to the tax code. "Our proposals are designed to make sure when it comes to paying taxes, everyone pays their fair share," she said. She noted that some of the proposals are aimed at purchasers of insurance, not the companies themselves.