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Making a profit on soldiers' death benefits

Insurance companies are coming under fire for holding back billions of dollars in death benefits and paying only a modest interest to beneficiaries.
Image: U.S. Tombstones at Arlington National Cemetery, Where Many Graves Are Likely Mismarked
A caisson carries a flag draped casket to its burial site in Arlington National Cemetery in Arlington, VA. Jim Lo Scalzo / EPA
/ Source: Business Week

Why are large life insurance companies profiting from billions of dollars they hold on behalf of the families of fallen military service members?

Bloomberg Markets magazine senior writer David Evans posed that question in an article in its September issue. The article, which took a close look at practices at Prudential Financial, has sparked sharp criticism from Cabinet members, reform proposals from U.S. lawmakers, and a fraud investigation by the New York Attorney General.

The U.S. Veterans Affairs Dept. and the National Association of Insurance Commissioners say they are reviewing military life insurance arrangements.

"It's disgraceful on the part of insurance companies," Senator John McCain (R-Ariz.), a onetime prisoner-of-war in Vietnam, said in an interview on Bloomberg Television. "We'll obviously have to be looking into it."

Under scrutiny are so-called retained-asset accounts. More than 100 carriers use the accounts to earn income on $28 billion owed to beneficiaries. New York-based MetLife, the biggest U.S. life insurer, retains about $10 billion and was among the carriers subpoenaed by Andrew Cuomo, the New York Attorney General.

Many life insurance companies suggest to beneficiaries that as an alternative to taking a lump-sum payment of death benefits, they leave the bulk of the policy proceeds with the carriers.

The accounts were set up for beneficiaries such as Cindy Lohman of Great Mills, Md. Her 24-year-old son had been killed by a bomb in Afghanistan. Prudential and the other insurers give the recipients limited checkbook-like access to the funds and pay modest interest.

Meanwhile, the carriers can invest the money, obtaining a far higher return than what they offer to beneficiaries. Families often receive misleading guarantees about the safety of the accounts, which are held in corporate coffers, not in federally insured banks, Bloomberg Markets found.

A half-dozen members of President Barack Obama's Cabinet sit on an advisory council overseeing life insurance for military service-members. The last time the council met, in November, none of the Cabinet members attended the annual meeting. Aides accustomed to handling the issue for their agencies go as representatives.

"The advisory council gets briefed on what's going on, how much money is going out, how many death benefits," says John Gingrich, chief of staff for Veterans Affairs Secretary Eric Shinseki.

Now, Shinseki and other Cabinet members have joined a growing number of lawmakers calling for an overhaul of insurer practices. Representative Debbie Halvorson (D-Ill.), has proposed a measure to set new rules for insurance companies that profit from accounts held for dead soldiers and veterans.

Prudential, based in Newark, N.J., defended retained-asset accounts as helpful to survivors, especially the loved ones of soldiers.

"For some families, the account is the difference between earning interest on a large amount of money and letting it sit idle," company spokesman Bob DeFillippo told Bloomberg. Prudential follows the law, he added.

MetLife spokesman Joseph Madden says his company similarly adheres to legal requirements. Its customers appreciate its version of retained-asset accounts, Madden adds. Beneficiaries get "peace of mind and time to make an informed decision while earning interest in the interim."