Phoenix
28th July 2010, 09:18 AM
http://www.bloomberg.com/news/2010-07-28/fallen-soldiers-families-denied-cash-payout-as-life-insurers-boost-profit.html
Fallen Soldiers' Families Denied Cash as Insurers Profit
By David Evans - Jul 28, 2010 7:00 AM PDT Wed Jul 28 14:00:00 UTC 2010
The package arrived at Cindy Lohman’s home in Great Mills, Maryland, just two weeks after she learned that her son, Ryan, a 24-year-old Army sergeant, had been killed by a bomb in Afghanistan. It was a thick, 9-inch-by- 12-inch envelope from Prudential Financial Inc., which handles life insurance for the Department of Veterans Affairs.
Inside was a letter from Prudential about Ryan’s $400,000 policy. And there was something else, which looked like a checkbook. The letter told Lohman that the full amount of her payout would be placed in a convenient interest-bearing account, allowing her time to decide how to use the benefit.
“You can hold the money in the account for safekeeping for as long as you like,†the letter said. In tiny print, in a disclaimer that Lohman says she didn’t notice, Prudential disclosed that what it called its Alliance Account was not guaranteed by the Federal Deposit Insurance Corp., Bloomberg Markets magazine reports in its September issue.
Lohman, 52, left the money untouched for six months after her son’s August 2008 death.
“It’s like you’re paying me off because my child was killed,†she says. “It was a consolation prize that I didn’t want.â€
As time went on, she says, she tried to use one of the “checks†to buy a bed, and the salesman rejected it. That happened again this year, she says, when she went to a Target store to purchase a camera on Armed Forces Day, May 15.
‘I’m Shocked’
Lohman, a public health nurse who helps special-needs children, says she had always believed that her son’s life insurance funds were in a bank insured by the FDIC. That money -- like $28 billion in 1 million death-benefit accounts managed by insurers -- wasn’t actually sitting in a bank.
It was being held in Prudential’s general corporate account, earning investment income for the insurer. Prudential paid survivors like Lohman 1 percent interest in 2008 on their Alliance Accounts, while it earned a 4.8 percent return on its corporate funds, according to regulatory filings.
“I’m shocked,†says Lohman, breaking into tears as she learns how the Alliance Account works. “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. Is there anything lower than that?â€
Millions of bereaved Americans have unwittingly been placed in the same position by their insurance companies. The practice of issuing what they call “checkbooks†to survivors, instead of paying them lump sums, extends well beyond the military.
Touching Americans
In the past decade, these so-called retained-asset accounts have 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., and the industry holds $4.6 trillion in assets, according to the American Council of Life Insurers.
Insurance companies tell survivors that their money is put in a secure account. Neither Prudential nor MetLife Inc., the largest life insurer in the U.S., segregates death benefits into a separate fund.
Newark, New Jersey-based Prudential, the second-largest life insurer, holds payouts in its own general account, according to regulatory filings.
New York-based MetLife has told survivors in a standard letter: “To help you through what can be a very difficult, emotional and confusing time, we created a settlement option, the Total Control Account Money Market Option. It is guaranteed by MetLife.â€
No FDIC Insurance
The company’s letter omits that the money is in MetLife’s corporate investment account, isn’t in a bank and has no FDIC insurance.
“All guarantees are subject to the financial strength and claims-paying ability of MetLife,†it says.
Both MetLife, which handles insurance for nonmilitary federal employees, and Prudential paid 0.5 percent interest in July to survivors of government workers and soldiers. That’s less than half of the rate available at some banks with accounts insured by the FDIC up to $250,000.
Bank of New York Mellon Corp. handles the paperwork and monthly statements for customers with MetLife “checking accounts.†The insurance company, not the bank, most recently reported holding about $10 billion in death benefits, in 2008.
The “checkbook†system cheats the families of those who die, says Jeffrey Stempel, an insurance law professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas, who wrote ‘Stempel on Insurance Contracts’ (Aspen Publishers, 2009).
‘Bad Faith’
“It’s institutionalized bad faith,†he says. “In my view, this is a scheme to defraud by inducing the policyholder’s beneficiary to let the life insurance company retain assets they’re not entitled to. It’s turning death claims into a profit center.â€
Prudential’s Alliance Account is 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. Prudential follows the law, he says.
“We fully and regularly disclose the nature and terms of the account to account holders,†DeFillippo says. “We make it clear that the money can be withdrawn at any time by simply writing a draft.â€
Metlife spokesman Joseph Madden says his company’s customers are very happy with the Total Control Account.
‘Overwhelmingly Positive’
“The feedback from TCA customers has been overwhelmingly positive,†he says. “The TCA affords beneficiaries security, peace of mind and time to make an informed decision -- while earning interest in the interim.â€
Madden says the company was paying some survivors 0.5 percent in July while some others got 1.5 percent or 3 percent, depending on the age and origin of insurance accounts. The accounts don’t violate any laws, Madden says, and are authorized by New York state insurance law.
Insurers are holding onto to at least $28 billion owed to survivors, according to three firms that handle retained-asset accounts for about 130 life insurance companies. There are no public records showing how much companies are holding in these accounts.
The “checks†that Cindy Lohman wrote, the ones rejected by retailers, were actually drafts, or IOUs, issued by Prudential. Even though the “checks†had the name of JPMorgan Chase & Co. on them, Lohman’s funds weren’t in that bank; they were held by Prudential.
Federal Bank Law
Before a check could clear, Prudential would have to send money to JPMorgan, bank spokesman John Murray says.
Insurance companies -- in addition to holding onto the money of survivors, paying them uncompetitive interest rates and giving them misleading guarantees -- may be violating a federal bank law. A 1933 statute makes it a felony for any company to accept deposits without state or federal authorization.
That means only banks or credit unions can accept deposits, says Arthur Wilmarth, a professor at George Washington University Law School in Washington who has testified before Congress about banking regulations.
If a prosecutor pressed an insurance company, retained- asset accounts could be outlawed because insurers say they deposit money into these accounts and don’t have bank charters or banking regulation, Wilmarth says. MetLife also offers its own version of certificates of deposit.
“If it swims, quacks and flies like a duck, the court could decide that it is indeed a duck,†he says. “You then potentially could have a criminal violation.â€
Potential Bank Run
This unregulated quasi-banking system operated by insurers has none of the protections of the actual banking system. Lawrence Baxter, a professor at Duke University School of Law in Durham, North Carolina, says the potential exists for a catastrophe.
If one insurer is unable to meet its obligations on retained-asset accounts, people could lose faith in other companies and demand immediate payment, triggering a panic, says Baxter, who has consulted with federal agencies on financial regulation.
The government established the FDIC in 1933 after frantic depositors tried to pull their money from banks. The federal government has no such program for death-benefit accounts.
“There’s more than $25 billion out there in these accounts,†Baxter says. “A run could be triggered immediately by one insurance company not being able to honor its payout. The whole point of creating the FDIC was to put an end to bank runs.â€
[remainder at link]
Fallen Soldiers' Families Denied Cash as Insurers Profit
By David Evans - Jul 28, 2010 7:00 AM PDT Wed Jul 28 14:00:00 UTC 2010
The package arrived at Cindy Lohman’s home in Great Mills, Maryland, just two weeks after she learned that her son, Ryan, a 24-year-old Army sergeant, had been killed by a bomb in Afghanistan. It was a thick, 9-inch-by- 12-inch envelope from Prudential Financial Inc., which handles life insurance for the Department of Veterans Affairs.
Inside was a letter from Prudential about Ryan’s $400,000 policy. And there was something else, which looked like a checkbook. The letter told Lohman that the full amount of her payout would be placed in a convenient interest-bearing account, allowing her time to decide how to use the benefit.
“You can hold the money in the account for safekeeping for as long as you like,†the letter said. In tiny print, in a disclaimer that Lohman says she didn’t notice, Prudential disclosed that what it called its Alliance Account was not guaranteed by the Federal Deposit Insurance Corp., Bloomberg Markets magazine reports in its September issue.
Lohman, 52, left the money untouched for six months after her son’s August 2008 death.
“It’s like you’re paying me off because my child was killed,†she says. “It was a consolation prize that I didn’t want.â€
As time went on, she says, she tried to use one of the “checks†to buy a bed, and the salesman rejected it. That happened again this year, she says, when she went to a Target store to purchase a camera on Armed Forces Day, May 15.
‘I’m Shocked’
Lohman, a public health nurse who helps special-needs children, says she had always believed that her son’s life insurance funds were in a bank insured by the FDIC. That money -- like $28 billion in 1 million death-benefit accounts managed by insurers -- wasn’t actually sitting in a bank.
It was being held in Prudential’s general corporate account, earning investment income for the insurer. Prudential paid survivors like Lohman 1 percent interest in 2008 on their Alliance Accounts, while it earned a 4.8 percent return on its corporate funds, according to regulatory filings.
“I’m shocked,†says Lohman, breaking into tears as she learns how the Alliance Account works. “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. Is there anything lower than that?â€
Millions of bereaved Americans have unwittingly been placed in the same position by their insurance companies. The practice of issuing what they call “checkbooks†to survivors, instead of paying them lump sums, extends well beyond the military.
Touching Americans
In the past decade, these so-called retained-asset accounts have 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., and the industry holds $4.6 trillion in assets, according to the American Council of Life Insurers.
Insurance companies tell survivors that their money is put in a secure account. Neither Prudential nor MetLife Inc., the largest life insurer in the U.S., segregates death benefits into a separate fund.
Newark, New Jersey-based Prudential, the second-largest life insurer, holds payouts in its own general account, according to regulatory filings.
New York-based MetLife has told survivors in a standard letter: “To help you through what can be a very difficult, emotional and confusing time, we created a settlement option, the Total Control Account Money Market Option. It is guaranteed by MetLife.â€
No FDIC Insurance
The company’s letter omits that the money is in MetLife’s corporate investment account, isn’t in a bank and has no FDIC insurance.
“All guarantees are subject to the financial strength and claims-paying ability of MetLife,†it says.
Both MetLife, which handles insurance for nonmilitary federal employees, and Prudential paid 0.5 percent interest in July to survivors of government workers and soldiers. That’s less than half of the rate available at some banks with accounts insured by the FDIC up to $250,000.
Bank of New York Mellon Corp. handles the paperwork and monthly statements for customers with MetLife “checking accounts.†The insurance company, not the bank, most recently reported holding about $10 billion in death benefits, in 2008.
The “checkbook†system cheats the families of those who die, says Jeffrey Stempel, an insurance law professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas, who wrote ‘Stempel on Insurance Contracts’ (Aspen Publishers, 2009).
‘Bad Faith’
“It’s institutionalized bad faith,†he says. “In my view, this is a scheme to defraud by inducing the policyholder’s beneficiary to let the life insurance company retain assets they’re not entitled to. It’s turning death claims into a profit center.â€
Prudential’s Alliance Account is 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. Prudential follows the law, he says.
“We fully and regularly disclose the nature and terms of the account to account holders,†DeFillippo says. “We make it clear that the money can be withdrawn at any time by simply writing a draft.â€
Metlife spokesman Joseph Madden says his company’s customers are very happy with the Total Control Account.
‘Overwhelmingly Positive’
“The feedback from TCA customers has been overwhelmingly positive,†he says. “The TCA affords beneficiaries security, peace of mind and time to make an informed decision -- while earning interest in the interim.â€
Madden says the company was paying some survivors 0.5 percent in July while some others got 1.5 percent or 3 percent, depending on the age and origin of insurance accounts. The accounts don’t violate any laws, Madden says, and are authorized by New York state insurance law.
Insurers are holding onto to at least $28 billion owed to survivors, according to three firms that handle retained-asset accounts for about 130 life insurance companies. There are no public records showing how much companies are holding in these accounts.
The “checks†that Cindy Lohman wrote, the ones rejected by retailers, were actually drafts, or IOUs, issued by Prudential. Even though the “checks†had the name of JPMorgan Chase & Co. on them, Lohman’s funds weren’t in that bank; they were held by Prudential.
Federal Bank Law
Before a check could clear, Prudential would have to send money to JPMorgan, bank spokesman John Murray says.
Insurance companies -- in addition to holding onto the money of survivors, paying them uncompetitive interest rates and giving them misleading guarantees -- may be violating a federal bank law. A 1933 statute makes it a felony for any company to accept deposits without state or federal authorization.
That means only banks or credit unions can accept deposits, says Arthur Wilmarth, a professor at George Washington University Law School in Washington who has testified before Congress about banking regulations.
If a prosecutor pressed an insurance company, retained- asset accounts could be outlawed because insurers say they deposit money into these accounts and don’t have bank charters or banking regulation, Wilmarth says. MetLife also offers its own version of certificates of deposit.
“If it swims, quacks and flies like a duck, the court could decide that it is indeed a duck,†he says. “You then potentially could have a criminal violation.â€
Potential Bank Run
This unregulated quasi-banking system operated by insurers has none of the protections of the actual banking system. Lawrence Baxter, a professor at Duke University School of Law in Durham, North Carolina, says the potential exists for a catastrophe.
If one insurer is unable to meet its obligations on retained-asset accounts, people could lose faith in other companies and demand immediate payment, triggering a panic, says Baxter, who has consulted with federal agencies on financial regulation.
The government established the FDIC in 1933 after frantic depositors tried to pull their money from banks. The federal government has no such program for death-benefit accounts.
“There’s more than $25 billion out there in these accounts,†Baxter says. “A run could be triggered immediately by one insurance company not being able to honor its payout. The whole point of creating the FDIC was to put an end to bank runs.â€
[remainder at link]