No. As with other life insurance settlement options, the money stays with the life insurer. However, the money is protected and the beneficiary has full access to the funds at all times. The money is as safe, perhaps even safer, with the insurer than with a bank, even taking into account FDIC insurance. That is because: (a) historically, many more banks have failed than insurers; and (b) there is a state guaranty fund system that insures at least as much as or more than the FDIC does. In many states the insurer guarantees are up to $300,000 (in some states as high as $500,000), whereas the FDIC insurance limit is $250,000 (recently raised from $100,000). No one has ever lost a cent in a retained asset account, but the same cannot be said for bank accounts that exceeded the FDIC limits or most other investment accounts. Moreover, as long as the death benefit remains with the life insurer, it is beyond the reach of the beneficiary’s creditors. Once the money is released by the insurer, the creditor protection no longer applies.
The money can be withdrawn immediately by writing a check for the full amount, or left in the account for as long as the beneficiary wants. The death benefit (but not the credited interest) is income-tax exempt; however, tax considerations might affect when the beneficiary might most advantageously withdraw the money.
Insurers generally do earn a higher rate on their investments than they pay on these accounts, but still pay an interest rate that compares favorably with other accounts of similar instant liquidity. The insurer also bears all the investment risk and provides a guaranteed positive rate of return irrespective of market conditions. In other words, even if the insurer were to lose money on its investments, the owner of the retained asset account would still earn interest. Some of the “spread” between the rate earned by the insurer and that paid on the retained asset account is used to cover the expense of providing this account. In some cases the difference between the insurer’s overall rate and the credited rate is small, because some insurers credit interest based on prevailing rates at the time the death occurred (which might be considerably higher than rates prevailing today).
The only money that can be added is money that comes from another life insurance death benefit from the same insurance company. This is not a deposit account like those provided by a bank or money market mutual fund.