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 transcript of the interview.
ROBERT SIEGEL: Cindy Lohman's son, Ryan, was a sergeant in the Army. A couple of weeks after he was killed in Afghanistan, she received documents concerning a $400,000 life insurance policy from Prudential. What she later learned about that policy is detailed in David Evans' expose in Bloomberg Markets magazine. Insurance companies make hundreds of millions of dollars in interest in life insurance policies after they've been paid out. They often keep the money in their uninsured corporate accounts and pay the policy beneficiaries far less than they could make by putting the money in the bank. Here to talk about this are Cindy Lohman and David Evans. Welcome to both of you.
DAVID EVANS (Journalist, Bloomberg Markets magazine): Thank you.
CINDY LOHMAN: Thank you, sir.
SIEGEL: And Cindy Lohman, let's start with what happened after you got the, the worst news that a parent could possibly hear, the fat envelope that arrived in the mail. Your son was insured. You have a benefit of $400,000. What did you do?
LOHMAN: We had actually received paperwork from the Army that asked us to select which option we wanted to choose with Prudential, either a monthly payment or a lump-sum payment. And, of course, I selected the lump-sum payment. Then we received this packet from Prudential that was the lump-sum payment, only it was in a checkbook. I assumed that it was an account, and I put it aside.
SIEGEL: I have a picture of just such a checkbook here that I've seen. And it says -- it looks like a check. It's drawn on Prudential's Alliance account. It's payable through JPMorgan Chase Bank. You tried drawing a check on this account?
LOHMAN: Yes, I did later. I went to a retail store. I attempted to purchase a mattress, of all things. And I was told that they couldn't accept the check because it couldn't be verified. I was really confused because it was JPMorgan Chase. The second time that I attempted to use the check was at Target this last May, and the exact same thing happened. They could not verify that check.
SIEGEL: David Evans, what's going on here? What are these checks, where was the money from this insurance policy and why couldn't Cindy Lohman easily draw upon it?
EVANS: Well, they're not actually checks. In the materials, you'll see checks in quotation marks. They're actually called drafts. And they represent IOU's from the insurance company. And rather than the insurance company having sent the money directly to the beneficiary in a check, they've kept the money in their corporate account. So they're continuing to earn a considerably higher rate of interest, oftentimes, than they're paying out. Right now, these accounts are paying a half a percent, where the corporate account is making 4 or 5 percent. So there's a big spread there. And this actually turned the paying out of death benefits into a secret profit center for the life insurance industry, including Prudential.
SIEGEL: Just to clarify, we're talking about earnings made on life insurance policies after the death of the insured person, and after the beneficiaries have been informed that the proceeds now can go to them.
EVANS: That's exactly right. Where people think this checkbook represents money that's left the life insurance company and come to them, in fact, the money remains at the life insurance company, earning profits for the life insurance company.
SIEGEL: Now let me ask the two of you this. If you were now to go back over that thick envelope you received from Prudential, would there have been some page somewhere which would have offered the choice to say, I just want a check. Send me a check for the amount and disperse the insurance policy. Was it in there, Cindy?
LOHMAN: Yes, it was in there. There was, buried down in one of the comments, you know, that if you wanted the account to be closed, to simply write the check and contact them and ask that the check be closed. People who are under emotional stress do not make the wisest of choices, and in retrospect, that's something that I really encourage people to do: Read through that, or have someone else read through it, or go through a financial counselor, who would advise you the same. The problem is most people who are under duress just simply miss those fine details.
SIEGEL: And Prudential, from the documents, would appear to be offering you a convenience. We'll set up the account for you right here.
LOHMAN: That's correct. That's correct.
SIEGEL: The next question, David Evans, is who, in theory, is regulating Prudential or MetLife in their operations? Or who could be regulating Prudential, in this case?
EVANS: Well, the insurance companies are regulated by state insurance regulators. And what I discovered is they oftentimes don't understand these accounts. There's no requirement that the amount in these accounts be reported to state insurance regulators, and they're not really equipped to regulate banks. I mean, this is a banklike operation, and they're in the business of regulating insurance.
So we've discovered that there's more than $28 billion in a million accounts at more than 130 life insurance companies. So essentially, there's a quasi-banking system out there that is not subject to the same kind of regulation that banks are subject to.
One thing I'd like to add, there are 4 million federal employees and their family members who are covered by the Federal Employees Group Life Insurance that's operated by MetLife, and the information that they get when a death claim is filed, their survivors are told by MetLife -- and I'm reading from the form -- we will automatically open a money market account in your name and mail you the checkbook. They don't say that it's not going to be at a bank, and they don't say that's not going to be FDIC insured. So, this is an automatic process in the case of service members and federal employees and veterans, and the choice to simply get a check is absent.
SIEGEL: Well, wait a minute. On the form that you're reading from, it doesn't also say: Or we could issue a check to you right now and send it to you?
EVANS: It does not say that.
SIEGEL: In the case of servicemen and women and their accounts, what does the VA say about this, David?
EVANS: Well, the VA told me that they've starting looking at the way they handle these accounts. It was kind of an odd position that I was in as a journalist to be explaining to the career civil servant at the VA how the program that he administers actually operates. He told me that he thought the people at Prudential were really good guys and that they don't make any money from the Alliance account. I had to explain to him that they did. And I was explaining to him that they make the difference between the half percent that are paid out to folks like Cindy and the 4 or 5 percent that they're making in their investment account.
SIEGEL: But he did understand that the money remained with Prudential until the survivor made some affirmative step to claim it and get it away from them.
EVANS: He did not understand that until I explained it to him.
SIEGEL: He did not understand that.
SIEGEL: And did he understand that the money was not insured by the FDIC when it -- well, wherever it was at that point?
EVANS: He was somewhat confused.
SIEGEL: And he administered this program?
SIEGEL: We've been hearing from Cindy Lohman, whose son Ryan was a sergeant who died in Afghanistan. He had one of these insurance policies. And it's written about in David Evans' article in the September issue of Bloomberg Markets magazine. The article is called "Duping the Families of Fallen Soldiers." David Evans and Cindy Lohman, thank you very much.
LOHMAN: Thank you very much, sir.
EVANS: Nice to be here.