What is a retained assets account? Should I use one and if so, for how long?

One method that insurance companies use for the payout on a life insurance policy is called a Retained Assets Account, or RAA. The account holds the money for the beneficiary and collects interest, and the beneficiary receives a draft or check book from which they can either withdraw or spend the money directly. As a way to hold the money until it can be put to better use, an RAA works well, but it may not be the best solution over the long term.

The idea is that the family of the deceased has enough things to deal with, and the payout from a life insurance policy could even be an uncomfortable reminder to the family. By putting the money into an RAA, the beneficiary of the policy has access to the money as needed, and the cash value of the policy continues to earn interest. On the surface, this may seem like the optimum way to handle the policy, but Retained Assets Accounts have come under fire recently, and there are very good reasons to be wary.

The first potential problem with an RAA is that, unlike a regular checking account, you do not have immediate withdrawal options. Instead, the beneficiary receives a checkbook from which to write withdrawals. By retaining control of the majority of the funds owed out to the policy, the insurance company continues to earn interest on the entire lump sum. Also, many RAAs are not deposited in a true banking account, and even though you have a checkbook to use for access to the funds, it is not unusual for the "checks" to be drafts, a type of check that is limited in where it will be accepted. This type of account is typically not protected under FDIC insurance, either, and that means the money could be forfeit if the holding company runs into financial difficulties.

The best solution is to use the RAA only until the beneficiary or the executor of the estate has had time to set up a savings or banking account. Once that is done, transfer the cash to the regular interest-bearing account. The money would then be protected under FDIC, the owner of the account would have immediate through checks, debit cards or personal withdrawal from the financial institution.