If your house is damaged in a storm, the likelihood is growing that your insurance company will hand you a prepaid debit card — instead of a check — to settle your insurance claim. For insurance consumers, the growth of prepaid debit cards could mean faster, easier claims payments.

Insurance companies still send paper checks in the mail, but they’re discovering it’s much cheaper to issue prepaid debit cards to pay certain claims.

Currently, the country’s largest auto and home insurer, State Farm, is experimenting with prepaid debit cards in 14 states, says Kip Diggs, a spokesman for State Farm. Right now, the State Farm cards are used to pay homeowner’s insurance claims. State Farm customers aren’t obligated to choose the debit card for receiving a claim payment; they still can choose to go the check or direct-deposit route.

Once the pilot program is completed, State Farm hopes to broadly issue prepaid debit cards to victims of catastrophes, such as tornadoes and floods, and to customers who don’t have checking accounts.

State Farm is among the insurance companies experimenting with prepaid debit cards for payment of insurance claims.

State Farm still is trying to iron out some issues, such as how to handle unused money on prepaid cards.

“We are confident that our pilot zones will continue to provide us with data we will be able to use to better the process for customers. I expect that sometime during 2011, we will see the project expand potentially to” the entire country, Diggs says.

For now, the State Farm pilot program is being carried out in Arkansas, Connecticut, Kansas, Louisiana, Maine, Missouri, New Hampshire, New Jersey, New York, Oklahoma, Pennsylvania, Rhode Island, Texas and Vermont.

Prepaid cards on the rise in insurance

The amount of money loaded onto insurance debit cards totaled about $575 million in 2009, up from about $565 million in 2008, according to Ben Jackson, a senior analyst with the Mercator Advisory Group, a consulting firm in Maynard, Mass., that tracks prepaid cards.

John Barbella, a senior vice president with Bancorp Bank based in Minneapolis, says he expects those numbers to keep rising as more and more insurers experiment with prepaid cards. Bancorp Bank supplies prepaid cards to more than a dozen insurance companies.

It’s easy to see why insurance companies are gravitating toward prepaid cards.

On average, an insurance claim check actually costs an insurance company about $10, which includes printing and mailing. By comparison, it costs an insurer less than $3 to issue a prepaid card and just 20 cents to reload it. For a workers’ compensation insurance claim — which typically involves a series of six to 10 payments — the average savings of paying via prepaid card vs. check is about 85 percent, according to Barbella.

Industry experts note that prepaid cards are much more effective if multiple claims payments are being made, such as when the owner of a destroyed home is compensated for hotel tabs and home repair or reconstruction bills.

One of the ways that insurers are using prepaid debit cards is for payment of homeowner’s insurance claims.

“Insurance companies can save money, but one of the biggest drivers is they can control the process and have a better solution providing consumers with immediate access to funds,” Barbella says.

Although the overall market for prepaid cards has been exploding, growth in the insurance business has been at a snail’s pace because the industry doesn’t make wholesale changes swiftly, says Jackson, the Mercator analyst.

“The insurance industry is very conservative by nature,” Jackson says. “The insurance companies are taking this nice and slow. They want to make sure they understand it.”

Not everyone has hopped aboard the prepaid card bandwagon. Peter Foley, vice president of claims administration with the American Insurance Association, says these cards are more complex than meets the eye. For instance, Foley says, a prepaid card would be difficult to use if electricity is out in a disaster-stricken area for weeks and no one there can use an ATM to access money from a prepaid card.

“If I needed money, I’d rather my insurance company just make a direct deposit it into my account,” Foley says.

How do these prepaid cards work?

• Consumers can use these cards the same as any other debit cards, says Robert Halpern, director of marketing for Restore Payment Solutions Inc. in Needham, Mass. His company issues prepaid cards to insurance companies.

• Typically, the card is sent to the consumer and a pin number is designated. The consumer can use the card to get cash or make purchases. As additional claims are approved, the same card can be loaded with more money by your insurance company.

• These cards allow consumers to tap into discounts with various vendors. Halpern says that users of the insurance debit cards supplied by his company can, for instance, earn 10 percent cash back at The Container Store and 7 percent cash back at Old Navy.

• If the card is lost or stolen, funds can be replaced, says Judith Rinearson, an attorney with the Bryan Cave LLP law firm. “If it’s a big wad of cash, then it’d just be gone,” she says.

What about the fees?

Just as with any prepaid card, consumers should read the terms of the prepaid insurance card carefully. In most cases, consumers can withdraw money from an ATM at least one time (without a fee) once funds are dispersed. After that, a fee may be charged. But consumers can go inside a bank – even if they don’t have an account there – and withdraw money from the card, generally without penalties.

Are there limitations on these cards?

• Insurance companies say they want to make the prepaid cards widely available, but there’s a chance that some vendors, such as a landlord, may not accept this form of payment. In such cases, the insurance company can write a check or make a direct deposit.

• The rules of prepaid cards can be quirky, Rinearson says. For instance, when used at restaurants, some prepaid cards automatically add a tip of a certain percentage to the bill.

• Not all states allow prepaid cards for payment of insurance claims. States such as New Jersey, New Mexico and Louisiana require payment of claims by check, says Terry Maher, an attorney with Baird Holm LLP who is general counsel for the Network Branded Prepaid Card Association.

–Lisa Shidler

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