Life insurers are facing broad criticism for profiting from the death benefits of soldiers and other life insurance policyholders even after a claim is supposed to be paid.
Insurers are using so-called "retained benefit accounts" to hold onto payments they owe to families of deceased policyholders. They deposit the funds in insurer-controlled accounts, rather than transferring the payment to a bank or issuing a check to beneficiaries. The practice allows the insurer to hold onto money and continue earning interest on funds they are otherwise required to pay out as claims.
Policyholders are told that their benefits are safey tucked away, and they’ll get interest payments in the meantime. But it’s rarely made clear that insurers are taking a cut of the interest their money is earning, or that the money’s not in a bank.
A Bloomberg story drew attention to the practice last month by highlighting the impact on military families.
The package arrived at Cindy Lohman’s home in Great Mills, just two weeks after she learned that her son, Ryan P. Baumann, a 24-year-old Army sergeant, had been killed by a bomb in Afghanistan. It was a thick, 9-by-12-inch envelope from Prudential Financial, 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 that 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.
…That money — like $28 billion in 1 million
death-benefit accounts managed by insurers — wasn’t actually sitting in
It was being held in Prudential’s general corporate account, earning
investment income for the insurer. Prudential paid survivors such as
Lohman 1 percent interest in 2008 on their Alliance Accounts, while it
earned a 4.8 percent return on its corporate funds, according to
"I’m shocked," Lohman said, breaking into tears as she learned 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?"
While insurers are expected to invest premium
payments until that money is needed to pay claims, they’re not
supposed to delay claims payments to pocket extra cash.
State regulators, federal lawmakers, attorneys general, and even financial regulators are weighing in. The practice will be discussed at the annual meeting of state insurance
regulators this weekend (even though it’ll be overshadowed by the
health care rules under debate). But making sure companies simply disclose to consumers how these accounts work (as some regulators are suggesting) won’t be enough. Insurers must guarantee that any interest earned on death
benefits go to the beneficiary, not the insurance company. Congress should investigate as soon as they’re back in Washington. This is one of those issues where a brief public opinion firestorm can quickly fade into nothing if the pressure doesn’t stay on.