Life Insurance Firms Profit From Death Benefits
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
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.
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.
"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.
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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."
MICHELE NORRIS, host:
From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.
ROBERT SIEGEL, host:
And I'm 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 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.
Mr. DAVID EVANS (Journalist, Bloomberg Markets Magazine): Thank you.
Ms. CINDY LOHMAN: Thank you, sir.
SIEGEL: And, Cindy Lohman, let's start with what happened after you got 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?
Ms. 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?
Ms. 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, you know, they couldn't accept the check because it couldn't be verified. The second time that I attempted to use the check was at Target this last May, and the exact same thing happened.
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?
Mr. 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 IOUs 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 is - 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.
Mr. 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 disburse the insurance policy. Was it in there, Cindy? I mean...
Ms. 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. 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. 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.
Ms. 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?
Mr. 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 bank-like 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 it'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?
Mr. 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?
Mr. EVANS: Well, the VA told me that they've started 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.
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.
Mr. EVANS: He did not understand that until I explained it to him.
SIEGEL: He did not understand that.
Mr. EVANS: No.
SIEGEL: And did he understand that the money was not insured by the FDIC when it - well, wherever it was at that point?
Mr. EVANS: He was somewhat confused.
SIEGEL: And he administers this program?
Mr. EVANS: Yes.
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.
Ms. LOHMAN: Thank you very much, sir.
Mr. EVANS: Nice to be here.
SIEGEL: And NPR asked both Prudential and MetLife for comment. Both companies insist they make it clear to beneficiaries that they can withdraw benefits easily, and in full, at any time. MetLife says while these accounts are not covered by the FDIC, something they say is explained in the materials given to customers. These accounts are fully guaranteed by the financial strength of MetLife - which in the company's words, has been delivering on its promises since 1868.
NORRIS: Prudential says the interest rate paid to beneficiaries has been comparable to other on-demand accounts. And they add, quote: While we have had years where we have made a profit, we have also had years when we had losses because we assume the investment risk for the money in the Alliance Account.
SIEGEL: We also called the Department of Veterans Affairs, who gave us this statement: The possibility that life insurance companies are profiting inappropriately from these service members' 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.
NORRIS: The statement goes on to say that: At the conclusion of the investigation, the VA will determine whether to continue the use of the Alliance Account program, and that it will be contacting current beneficiaries to remind them of their options under the program.
You can find these statements in full, plus much more about this story, at our website, npr.org. Transcript provided by NPR, Copyright National Public Radio.
