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Insurance Companies Profit From Fallen Soldiers’ Funds

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A U.S. Marine casket team prepares to lower the remains of Cpl. Nicolas Paradarodriguez, who was killed in Afghanistan, during a funeral service at Arlington Cemetery on May 27, 2010. (Mark Wilson/Getty Images)

For the families of fallen soldiers, funds from their loved ones’ life insurance policies may provide little comfort for their loss, but it just adds insult to injury to learn that insurance companies have set the system up so they make a profit by holding onto payouts, using the funds to make more money, and pocketing most of the earnings.

According to an excellent investigation published by Bloomberg yesterday, that’s exactly what happens with “retained-asset accounts,” which have become “standard operating procedure” in the life insurance industry.

With these “retained-asset accounts,” instead of writing a check for a lump sum, insurers send beneficiaries something that resembles a checkbook and assures them that the money is in a secure, interest-earning account.

In reality, according to Bloomberg, the insurer holds onto the funds and uses them to earn investment income. Prudential, for instance, earned a 4.8 percent return on such funds in 2008, while paying beneficiaries far less interest. Here’s Bloomberg:

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.

What’s more, the “checks” aren’t always accepted because the process for retailers to receive reimbursement is more complicated—the money isn’t pulled directly from a bank account because it needs to first be transferred from the insurer.

Though some states are looking into the matter, few states have rules on retained-asset accounts, and the Office of Veterans Affairs—which pays Prudential for life insurance for soldiers—has allowed the practice, according to Bloomberg.

Prudential, however, said it made the proper disclosures and argued that the retained-asset accounts are helpful for families.

“For some families, the account is the difference between earning interest on a large amount of money and letting it sit idle,” spokesman Bob DeFillippo told Bloomberg.

Government workers should also beware. The practice extends beyond the military, according to Bloomberg.

“They’ve kind of created a sort of shadow banking system,” said David Evans, author of the Bloomberg piece, in an interview available online. “There are now a million of these accounts that hold $28 billion of money that would’ve been paid out in the old days to survivors, and is now being held as a profit center for the life insurers.”

Steve Feldmann

July 29, 2010, 9:57 a.m.

Three things about the retained asset account:

1. This practice is not new.  It has been going on with the major insurance companies you mention for over twenty years, and is not limited to military or government workers.  It has been their standard operating procedure for a long time.

2.  It is easy to get out.  Just write a “check” for the full amount of the account and deposit it in your own checking or savings account. It might take longer to clear, for the reasons you specify.

3. With some companies, the RAA can be avoided if beneficiaries read the death claim form carefully.  There may be an election section that directs the lump-sum payment.  The default is the RAA.

I was the beneficiary on a policy of one of my family members.  I was offered the “checkbook” option but declined.  One has to read the information carefully.  Unfortunately not everybody undersatnds the consequences of the choices.

The initial expose by Bloomberg is a good piece of work. What this derivative story (which does give credit) fails to make clear in so many words is that the beneficiary can obtain the full benefit in a lump sum on request.
Why is that omitted?

It should be required by law that the insurance company clearly notify the beneficiary that they can receive the lump sum rather than hiding this information in a form which is not written in plain english and at a time when family members are still trying to deal with a great loss.

This is pretty much a non-story. As has been said, insurance companies have been doing it for a very long time. As distinct from all the deceptions and slight of hand we all experience with banks, the insurance companies will write a check for the full amount as soon as the beneficiary says they want it, no questions asked. The slight loss of earnings potential is not a bad trade off for the beneficiary being able to take their time making a decision and having check writing abilities in the meanwhile. Sure it’s a small profit center for the insurance company. So what?

This is a disgusting practice that the Insurance industry practices. Profiting on the death of someone, being less than honest, is no big thing, as Mr Gurley says? You sound like you work in the industry? You also sound like it’s O.K. for every other industry to take advantage of the people who support them with business. Your attitude of so what, everybody does it, shows how you are helping destroy the American way of life. I wonder, have you served your country in the Military, or are you one of the “Chicken Hawks”? I ask, as I’m an Ex-U,S,M.C. and proud of it.

Steve Feldmann

July 30, 2010, 8:29 a.m.

We certainly have a broad range of responses to this article!  Good discussion points by all.
    In the spirit of full disclosure, I am a Trust Oficer for a regional bank, and hold a Pennsylvania Life and Health Insurance Producer’s license.  So I’ve kicked around this area of the financial world as both a seller and as a trustee-consumer.
    While I understand Norman’s reaction, I don’t begrudge a life insurance company its profit.  By definition, they “profit on the death of someone.”  If the company doesn’t make money on the policy, all policy holders’ interests are in jeopardy.
    Russ Gurley’s assertion that insurance companies are pure as the driven snow, as compared to those deceiving, slight-of-hand banks (like me!), is a bit disingenuous. The claim forms may or may not be clear that lump-sum is available, and I have sometimes had difficulty in getting the lump-sum.  But, as he says, the companies I’ve dealt with know they can’t deny lump-sum payment, and pay out eventually.
    Despite heavy regulation by state and federal rules in both banks and insurance companies (and perhaps because of it!), financial services forms are unclear and easy to misunderstand.  And when you add Pat’s observation that grieving people rarely can be analytical enough to get it all.  Those of us in these industies have an obligation to help objectively.

I assume this is a method of funding the insurance company as the premiums paid usually don’t amount to the benefits paid out.

As Norman suggests, I’m pretty familiar with disgusting practices in the financial industy, but not in supporting them. My life’s work is in helping people to identify them and avoid or escape them. I do so with at least as much passion as Norman seems to have. I’ve even argued with some insurance companies for being a bit too deceptive about this practice. And, no I was not chicken. I volunteered during Viet Nam and served four years proudly. All said, in the godawful range of things going on in the financial industry, I observe this one to be very small. Far worse is the bevy of vultures that will inevitably surround a grieving spouse when she/he walks into the bank to deposit an insurance company check for $100,000.

Brother Jonah

Aug. 2, 2010, 12:57 a.m.

Yeah, cash that sucker out as soon as you get it. These kids didn’t know or didn’t care about the Mortgage Scam they used to crash the economy, or more precisely, the Investment Banks who underwrite them didn’t.  The condescending talk from the Industry Rep who said it’s “beneficial to some families because they have a Large Amount” of money is hooey.  As in Hoo..Wee them boys can sure talk them some slick trash.

They’re not talking million dollar payouts or even 6 figures. A family who are already struggling (look up Operation Home Front to see what that’s like, if you’ve never been “in” that is… if you have you already know) suddenly left with Survivors benefits and that “whopping” 20,000 check. The Insurance payout is something like a years wages.

As for knowing what you’re doing when you’re filling out the form, they make you fill out that form in a room full of other overtaxed recruits on the second or third day of basic training. You have to fill it out with a Second Lieutenant barking at you to hurry up. Not really all that much time to read a nine page document, you know? The beneficiaries don’t fill it out, the soldier who is no longer going to be around when the payment comes, is the one filling it out.

The insurance company representative who wants you to sign your money automatically into the account isn’t looking out for the best interest of the beneficiary, he works for the Company, not the widows and orphans. “Don’t you worry, Mrs. Jones, we’ll take care of everything. Trust us, we’re the experts” That’s how you get talked into paying 10 grand for a casket to bury your loved one too.

Newly widowed isn’t the time when people make the best judgments, especially financial. If the VA doesn’t understand that after all this time then there’s something hugely wrong with that too.

Brother Jonah,  You speak with clarity, as one who has been there. Good for this discussion. Indeed, the majority of the industry types haven’t the foggiest idea what it’s like down in the trenches. Like you mention of the 2nd Lt., so to, are the people who are working in the lower end of all the people serving industries that base their interest on the bottom line.  This is the result of having such a vast bureaucracy as exists today. As you also mention a time element, the same applies to the private industry training of new people working the desks & phones. Pressure, produce, promotion. But it’s no excuse for insensitivity, incompetence, rudeness on the part of the employees whose job it is to provide a service to those who have lost a loved one due to a stupid war.

Gerhard Magnus

Aug. 2, 2010, 9:26 a.m.

Republicans even suck up to insurance companies! Amazing!

Just Corporate America screwing the little guy, again…....

Disgusting!

If they are charged with any wrongdoing they will pay a negotiated fine to the regualtors and settle WITHOUT ADMITTING OR DENYING ANY WRONG DOING and business will go on as usual. A standard practice the companies know will work for them since they have been through it time and time again. The system will never change.

As ususal, two sides to the story and the truth is probably somewhere in between.  This is a “damned if you do, damned if you don’t” issue for insurance companies.  Imagine if they simply mailed out lump sum death benefits to unprepared, possibly uneducated, grieving beneficiaries making them subject to unscrupulous predators.  They would be demonized.

The retained assets account is clearly an appropriate option as long as it is not mispostured and all options are made known and equally available.  The whole “profiting on death” commentary is very disingenuous.  Every institution/company makes money on money and it is unfair to single out an insurance company.  If the money was put in an account at a bank then that bank is “profiting on death” to the same extent.  In a way, if the money was used to buy a new car then the dealer is “profiting on death”.

I’m a fee-based life insurance consultant and I am a frequent critic of the industry but I feel this is being hyper politicized and emotionalized.  Nothing about this is is wrong unless it is being mispostured to the beneficiaries.  Many people are happy for the option.

read my full commentary at billboersmaonlifeinsurance.info

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