Life Insurance Firms Profit From Death Benefits

Cindy Lohman is seen holding a photo of her son Ryan, who was killed by a bomb in Afghanistan. i i

Cindy Lohman is seen holding a photo of her son Ryan, who was killed by a bomb in Afghanistan. She says she feels betrayed by Prudential, his life insurance company. Bill Cramer/Bloomberg hide caption

itoggle caption Bill Cramer/Bloomberg
Cindy Lohman is seen holding a photo of her son Ryan, who was killed by a bomb in Afghanistan.

Cindy Lohman is seen holding a photo of her son Ryan, who was killed by a bomb in Afghanistan. She says she feels betrayed by Prudential, his life insurance company.

Bill Cramer/Bloomberg

Life insurance companies delay issuing death benefits owed to families of service members and others by promising to hold the money in safekeeping, an investigation by Bloomberg Markets magazine found. Senior writer David Evans and Cindy Lohman, whose son was killed in Afghanistan, discuss the findings with NPR's Robert Siegel. Below is a preview of Evans' September 2010 magazine article. Read a transcript of the interview.

Millions of Americans are being duped by life insurance companies that have figured out a way to hold onto death benefits owed to families. MetLife and Prudential lead the way in making hundreds of millions of dollars in secret profits every year on money that belongs to relatives of those who die, an investigation by Bloomberg Markets magazine found. Among the people being tricked are parents and spouses of U.S. soldiers killed in battle in Iraq and Afghanistan.

Survivors of service men and women are told they'll get a $400,000 life insurance payout. They don't. Instead, Prudential — which has a government contract to provide life insurance for military families — keeps their money.

Families are surprised when they receive what looks like a checkbook. In documents, Prudential promises to hold the money in safekeeping for as long as families would like, saying it will pay them 0.5 percent interest. What Prudential doesn't disclose is that it is keeping survivors' money in Prudential's own corporate investment account, where the company is earning five to 10 times as much as it pays to families. The so-called checks have JPMorgan Chase printed on them, but they cannot be used as regular checks. Instead, they are to be submitted back to Prudential to get any money

Heard On 'Morning Edition'

But the money isn't in a bank, and it's not protected by FDIC insurance. None of these facts are spelled out to the survivors; the details are often hidden in fine print.

Nor are families told that they could earn more than twice as much interest by opening FDIC-insured money market accounts at banks across the country. Families of fallen soldiers say they often don't want to touch the "checkbooks" because they view them as payments in return for their sacrificed child. As a result, Prudential holds onto the death benefits, often for a year or more.

"I'm shocked," says Cindy Lohman, a Maryland woman whose son, Ryan, was killed in Afghanistan in 2008. "It's a betrayal. It saddens me as an American that a company would stoop so low as to make a profit on the death of a soldier."

Millions of Americans have unwittingly been placed in the same position by their insurance companies. The practice of issuing so-called "checkbooks" to survivors, instead of paying out lump sums, extends well beyond the military. In the past decade, this tactic has become standard operating procedure in an industry that touches virtually every American: There are more than 300 million active life insurance policies in the U.S. MetLife alone holds $10 billion in death benefit money that belongs to grieving families. MetLife makes $100 million to $300 million a year by investing, mostly in the bond market, money that belongs to survivors.

Sample check i i

A sample "check" sent to survivors as part of Prudential's Alliance Account kit. Courtesy of The Department of Veterans Affairs hide caption

itoggle caption Courtesy of The Department of Veterans Affairs
Sample check

A sample "check" sent to survivors as part of Prudential's Alliance Account kit.

Courtesy of The Department of Veterans Affairs

Insurance companies say they're providing their customers with a service. Prudential's checkbook accounts are helpful to families of soldiers, says company spokesman Bob DeFillippo.

"For some families, the account is the difference between earning interest on a large amount of money and letting it sit idle," he says. (Read a statement from Prudential.)

MetLife spokesman Joseph Madden says his company's customers are very happy with the system.

"The feedback from customers has been overwhelmingly positive," he says. "We afford beneficiaries security, peace of mind and time to make an informed decision — while earning interest in the interim." (Read a statement from MetLife.)

How big is the unregulated quasi-banking system operated by insurers? There are now more than a million of these accounts holding more than $28 billion at 130 life insurance companies.

The VA's Response

Below is a statement from Mike Walcoff, acting undersecretary for the Veterans Benefits Administration, in response to the Bloomberg Markets magazine report.

"The primary goal of the Government Life insurance programs for Servicemembers and Veterans has always been to ensure the financial security of their families and loved ones during a very difficult time. The possibility that life insurance companies are profiting inappropriately from these Servicemembers' sacrifice is completely unacceptable. The VA is conducting a full investigation into the life insurance companies and their procedures in this program to ensure that survivors are fully protected and being treated fairly with the utmost care and respect. The VA is deeply concerned that military and Veteran families may potentially be harmed in some way by the use of the Alliance Account program. At the conclusion of the investigation VA will determine whether to continue the use of the Alliance Account program. Additionally, VA will be contacting the approximately 10,000 current survivors to remind them of their options under the SGLI program."

"It's outrageous that they're profiting off other people's grief," says Mark Umbrell in Doylestown, Pa. His 26-year-old son, Colby, an Army Airborne Ranger who earned a Bronze Star and a Purple Heart, was killed in Iraq in May 2007. Umbrell was among those who got a "checkbook" account. "I think we're being taken," he says.

The question for Umbrell, Lohman and a million others with these accounts is whether anyone will hear their cries. State bank regulators say if there are to be any changes, they should be made by their counterparts at state insurance departments. Officials at those state agencies often say they don't even understand what the insurance industry is doing with these "checkbook" payouts.

Just six states had any rules for retained-asset accounts as of July 2009, according to the National Association of Insurance Commissioners. Arkansas, Colorado, Kansas, Nevada, North Carolina and North Dakota require insurers to disclose fees and interest rates and to tell survivors they may withdraw all of the money by writing a single check. Maryland, which isn't on the NAIC list, also has rules.

Pennsylvania Insurance Commissioner Joel Ario, whose state has no rules for retained-asset accounts, says he has asked his staff to prepare a regulation forbidding insurance companies from using such accounts as the default method of paying a death.

"It's flown under the radar," says insurance law professor and author Jeffrey Stempel. "Regulators have not done their job."

Until public officials wake up, the bereaved will remain a secret profit center for the life insurance industry.


Reading Between The Lines: Insurance Companies' Fine Print On Death Benefits

NOTE: Text highlighted in yellow by NPR.
 

Alliance: Not insured by the FDIC i i

Above, a paragraph is found at the bottom of a page, "Answers to Frequently Asked Questions," in Prudential's Alliance Account kit. The highlighted sentence explains that balances in these retained asset accounts are not insured by the Federal Deposit Insurance Corp. (FDIC). Courtesy of Bloomberg hide caption

itoggle caption Courtesy of Bloomberg
Alliance: Not insured by the FDIC

Above, a paragraph is found at the bottom of a page, "Answers to Frequently Asked Questions," in Prudential's Alliance Account kit. The highlighted sentence explains that balances in these retained asset accounts are not insured by the Federal Deposit Insurance Corp. (FDIC).

Courtesy of Bloomberg
MetLife: How Can I Withdraw Money? i i

Above are excerpts of MetLife customer agreement documents from 2006 and amended in June 2010 to inform survivors that their insurance proceeds are not held in a bank. Left image, Courtesy of Bloomberg; Right image, MetLife via Bloomberg hide caption

itoggle caption Left image, Courtesy of Bloomberg; Right image, MetLife via Bloomberg
MetLife: How Can I Withdraw Money?

Above are excerpts of MetLife customer agreement documents from 2006 and amended in June 2010 to inform survivors that their insurance proceeds are not held in a bank.

Left image, Courtesy of Bloomberg; Right image, MetLife via Bloomberg
MetLife: Money Market Option i i

Above are excerpts of MetLife customer agreement documents from 2006 and amended in June 2010 to say the account is not "a money market account" and not insured by the FDIC. Left image, Courtesy of Bloomberg; Right image, MetLife via Bloomberg hide caption

itoggle caption Left image, Courtesy of Bloomberg; Right image, MetLife via Bloomberg
MetLife: Money Market Option

Above are excerpts of MetLife customer agreement documents from 2006 and amended in June 2010 to say the account is not "a money market account" and not insured by the FDIC.

Left image, Courtesy of Bloomberg; Right image, MetLife via Bloomberg
MetLife: How Much Does The Account Cost Me? i i

Above are excerpts of MetLife customer agreement documents from 2006 and amended in June 2010 to explain that survivor benefits are held in MetLife's general account and "are subject to MetLife's creditors" and that MetLife "may receive a profit." Left image, Courtesy of Bloomberg; Right image, MetLife via Bloomberg hide caption

itoggle caption Left image, Courtesy of Bloomberg; Right image, MetLife via Bloomberg
MetLife: How Much Does The Account Cost Me?

Above are excerpts of MetLife customer agreement documents from 2006 and amended in June 2010 to explain that survivor benefits are held in MetLife's general account and "are subject to MetLife's creditors" and that MetLife "may receive a profit."

Left image, Courtesy of Bloomberg; Right image, MetLife via Bloomberg

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