Unless I'm missing something, I think the insurance company is blowing smoke (or smoking an illicit substance). I'm not aware of any reason not to accept money orders or cashier's checks in payment for insurance premiums.
The insurance company may have concerns with accepting large payments (single premium annuities, etc.) because they might have CTR filing requirements, but I don't see the issue with garden-variety payments.
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John S. Burnett
BankersOnline.com
Fighting for Compliance since 1976
Bankers' Threads User #8