Bloomberg: Fallen Soldiers’ Families Denied Cash as Insurers Profit

Posted by Kendall Harmon

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.

Read it all.

Update: NPR did a whole segment on this story which is very worthwhile also.

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13 Comments
Posted July 29, 2010 at 6:30 am [Printer Friendly] [Print w/ comments]



1. Br. Michael wrote:

The article fails to point out that because insurance companies are not banks none of them are covered by the FDIC.  Instead there is a separate State guaranty fund system to cover claims in case of insurer insolvency.  The lack of FDIC coverage is a totally irrelevant.  It’s like claiming that your local restaurant is not covered by FDIC.

The real question is how would this insurance company obligation would be handled under the receivership statue in its state of domicile.  I am not sure that the writer of this article knows what he is talking about or even basic insurance company regulation.  Just because something is not federally regulated does not mean that it is not regulated.

July 29, 8:07 am | [comment link]
2. BlueOntario wrote:

Following on Br. Michael’s post, it sounds like someone somewhere desires to “federalize” the remainder of the insurance industry the way we have recently made health insurance fall under Federal statute.

July 29, 8:31 am | [comment link]
3. David Keller wrote:

Wait one minute—the article may not know what it is talking about, but where does Prudential get the authority to profit off dead GI’s? They owe her $400K in a check—not in an account which they use to make money off of. The fact that she might blow it in Las Vegas is no body’s business.  It’s an enforceable contract.  Plus, having had personal dealings with Prudential, I would cash the check really fast.

July 29, 9:46 am | [comment link]
4. Emerson Champion wrote:

#3: David has grasped the central point, which is illustrated in this quote from the article:

Gerry Goldsholle, the man who invented retained-asset accounts, says MetLife makes $100 million to $300 million a year from investment returns on the death benefits it holds. A former president of MetLife Marketing Corp., Goldsholle, 69, devised the accounts in 1984. He’s now a lawyer in private practice in Sausalito, California. Goldsholle says he pondered the billions of dollars of death-benefit proceeds the company paid out each year.

“I looked at this and said this is crazy,” says Goldsholle, who left the firm in 1991. “What are we doing to retain some of this money?”

The Gospel reading for this Sunday, August 1st, is the parable of the rich man who had nowhere to store his crops. (Luke 12:13-21)

July 29, 10:43 am | [comment link]
5. Br. Michael wrote:

What is she going to do stuff in in a matress?  Someone is going to make money off it.  If she puts in a Bank the bank will invest it and make money off it and pay her some interest just as the insurance company is doing.
If she doesn’t like the rate of interest the insurance company is paying she can withdraw the whole thing and invest it where she wants at any time.  The company is not, I say again, NOT holding the money against her will.  If she wants to stuff in in a matress or blow it at a cassino the insurance company is not stopping her.

She is an adult for crying out loud.  She has to make some effort to manage her financial affaires and if she doesn’t know what to do get some help from a financial advisor.

July 29, 11:22 am | [comment link]
6. KevinBabb wrote:

This is a tempest in a teapot. The issuance of checks is simply a convenience to the beneficiary. If she does not want to keep the money in the account provided by Prudential, she only has to take check number 1, write it to herself for $400,000.00, and deposit it in the bank of her choice, and now she has complete control over the money.  What is hard or deceptive about that?  It’s not as though Prudential was going to send her the $400,000 in cash—she’s going to get the indemnity amount in a check, in any event.

And Br. Michael is right…what difference does it make if Prudential makes money on the proposition, as long as the serviceman’s mother gets the payment promised to her in the contract? 

Somebody has an agenda here. And as someone whose career involves a lot of rhetoric (in the literal, classical sense—persuasive communication), I am always suspicious when the author/speaker throws in heartrending details that have nothing to do with the merits of the situation.  What difference does it make if the beneficiary makes her living teaching special needs children, or selling cigarettes, or running a tavern or a casino?  This is strictly a matter of contract between the parties.  From what I can see, Prudential did everything it was obligated to do under the contract—so where’s the problem?

If we don’t shed this Marxist-Obama-ist notion that “behind every great fortune is a great crime” (Balzac, I think), we’re going to find our economy bereft of the concentrations of capital that have provided us with the highest standard of living in the history of the world.  To quote a contemporary philosopher: “When was the last time that a poor guy gave you a job?”

July 29, 12:41 pm | [comment link]
7. Bart Hall (Kansas, USA) wrote:

Having an uncle who worked his entire career with Aetna (as an actuary), I’d go even farther than previous commenters. Insurance companies have a fiduciary obligation to provide as a default some option other than immediate full pay-out.

Standard advice in cases of grief is to avoid making major decisions—financial and otherwise—for at least a year. Use life insurance to pay off all debts of the deceased (which were probably minimal for the young man in this case) and then sit tight until your mind has had some time to clear.

Insurance companies would be held negligent it they automatically cut a large check to each and every beneficiary. As long as the beneficiary did not say, in writing, “Give me all the money, please.” there is absolutely no story here.

An effective vignette of ignorance, yes, but scandal? Not at all.

July 29, 12:47 pm | [comment link]
8. David Keller wrote:

Sorry, guys, but I still disagree.  If you are an unsophisticated mother of a DEAD HERO (key words to my upset over this)and you get SGLI which you think is due to military serivce, then you are going to be inclined to believe that the government is recommending that you do this and somehow it is safe, good and normal. What you or I would do is really irrelevant, because I believe all the commentators are quite sophisticated. And to think that any life insurance company is doing this out of some perceived fiduciary duty is ridiculous.  Bart—I don’t know the law everywhere, but where I practice law, the contractual duty to pay an insuranace benefit, is governed by the contract.  In essence the beneficiary doesn’t have to say “give me the money” becasue Sgt. Lohman already had a conntract with Prudential telling them to give it to his mom. They are doing this solely so they can keep the money rather than letting someone else have it, as pointed out by #5. And Bart—my view is the polar opposite of Obama/Marx.  I think they are obligated to give her the check and she can darned well do what she wants with it. Just so you’ll know, my main objection to this tactic by Prudential is they are making money off a dead hero.  I’d be less concerned if it was somebody’s dad who died and left an annuity. And if you know the history of Prudential, which I am certain they failed to reveal or feel they had any fiduciary duty to reveal,  she will want to get the money out of there ASAP.

July 29, 2:36 pm | [comment link]
9. Sick & Tired of Nuance wrote:

1) The beneficiaries are not told the money is being held in a non-FDIC insured account.  They are led to believe that the money is in a bank (JP Morgan).  They do not know that the money could be taken by creditors if the insurance company goes bankrupt.

2) The beneficiaries are not given a prospectus by the insurance company for the money market accounts they are placing the money into, in violation of SEC rules.

3) The beneficiaries are never counseled that they have a one year window to put the money into a Roth IRA or face taxes if they decide to do so later.

The policies stipulate that the insurance company will pay the beneficiaries a lump sum.  They do not.  They give them a “checkbook” with the name of a bank on the “checks”.  They imply that the money is in a bank account with FDIC depositor insurance and it isn’t.  Furthermore, if a person leaves the money in the account (as perhaps a retirement savings), the money can be siezed by the state after 3 years of no activity.

People do not know this.  I had SGLI and currently have FEGLI, and we were all under the impression that these were GOVERNMENT insurance…never a hint that it was a private insurance company.  We were told that our survivors would get a lump sum.  They lied to us.  They have been deceiving millions of people for decades and ripping them off to the tune of hundreds of millions of dollars a year.  The return on the money from the retained asset accounts is below market returns for Certificates of Deposit.  The VA and the OPM were unaware that the money was being held by the insurance companies.  They were under the impression that the money was being held in BANKs that are insured and regulated.  There are TRILLIONS of dollars that are unregulated in these accounts.  These accounts can be drained in the event of a bankruptcy, and the beneficiaries’ money can be taken by the insurance companies’ creditors.  A run on these unregulated accounts could cause a financial collapse.

This is a vile and unethical practice.  I just found out about it yesterday and have been spreading the word as best I can so that those with these policies can take appropriate action.

July 29, 3:14 pm | [comment link]
10. KevinBabb wrote:

Well, #8., if Prudential’s sin is “making money off of a dead hero”, then you really have no basis for outrage here.  Even if the serviceman enlisted at 18, and Prudential had been taking premiums from the government for 6 years, it is highly unlikely that Prudential made money in his case, when you net out the premiums paid, and even some interest earned, against the indemnity paid out. I am sure that Prudential lost hundreds of thousands of dollars on this man’s case—which is a risk they take as part of their business, and for which they make actuarial provision over the entire portfolio of policies they write.

Actually, where Prudential makes its money, as you would expect with a life insurance company, is from all of the un-dead heroes…the vast majority of service members for whom the government pays premium, but who do not die during their terms of service. So, are you offended by Prudential making money off of LIVE heroes—since these are the cases on which they make money for their shareholders/policyholders (I don’t know if Pru. is a stock or mutual company)? And, if so, maybe the “solution” is for the government to omit that benefit to servicemembers and their families, since no private company is going to write business (which is called “business” for a reason) in such substantial numbers as to cover all active-duty servicemembers unless their is some possibility for profit. That is, unless one endorses the idea that the Federal Government (those people who brought you the efficiency of the Postal Service and the compassion of the IRS) should directly underwrite, adjust and pay out these claims—which is, I suspect, the agenda of the author of the article.

And thus Statism marches on—and swallows the efforts of those heroes who fight for freedom.

July 29, 3:17 pm | [comment link]
11. Br. Michael wrote:

9, that maybe true, but that is not stated in the article.  Insurance companies are regulated by the states and are placed into state receivership not bankruptcy.  I know because I did it for 20 years.  If the facts are as you say and if the company is misrepresenting what is going on then the state regulators can do something about it.  And if what you say is true then it would seem that the Federal Government is a party to the lie.  It is also quite possible that everything is fully disclosed in the packet of materials, but the article does not favor us with the papers that the mother was sent.

At one time I was trustee of a Merill Lynch investment account and we were given “check books” to draw on that account.  I suspect that part of the problem is that the mother didn’t bother to read the documentation or discuss it with anyone.  And she clearly knew that she had the option to withdraw the money.  As adults sometimes you have to think for yourself and seek advice and get help with a thick package of financial material if you don’t understand it.

And as I pointed out there is state guaranty fund protection which affords similar protection to the FDIC.  However I would want to check the particular state’s insolvency statute and the priority of claims to make sure this wouldn’t be a general creditor claim.  I also would point out that $400,000 is in excess of FDIC’s $250K limit.

July 29, 4:28 pm | [comment link]
12. Sick & Tired of Nuance wrote:

Br. Michael,

I understand where you are coming from, but if you read the 11 pages of the article you will see that 1)the VA “experts” did not understand that the beneficiary’s money was not in an FDIC protected bank account 2) the OPM “experts” did not understand that the beneficiary’s money was not in an FDIC protected bank account 3) the state insurance regulators did not understand that the beneficiary’s money was not in an FDIC protected bank account.

Clearly, if all of these experts didn’t understand that retained asset accounts are not deposited in bank accounts for the beneficiaries, it might just be possible that the information is not readily discernable in the documentation provided by the insurer.  The fact that the insurance company puts a bank logo on their “checks” and that there is no FDIC disclaimer and that they do not issue the SEC required prospectus sort of all add up to a deceptive practice…don’t you think?

I didn’t even know that SGLI or FEGLI insurances were provided by private companies.  We are never informed about that when we signed up for the insurance.  We were absolutely told our beneficiaries would receive a lump sum.  No mention was ever made about “check books”.  No mention was ever made that the insurance company would keep the money in their accounts by default.  I was enrolled in SGLI from 1984 until 2002 and I never knew any of that.  I was enrolled in FEGLI from 1992 to the present and never knew that until this article appeared yesterday (July 28th).  I also never knew, and so could not advise my beneficiary (my wife and our 3 kids) that there was only a year long window to put money into a Roth IRA tax free. 

Now that I know, I told my wife to take the lump sum out of the MetLife retained asset account and put it in several different FDIC banks where she can at least earn the CD rates until she has competent advice (from a financial planner) on what to do with the money.  That way, the money I am leaving for my family will go to help my family and be protected from risks that they didn’t even know were there.

July 29, 8:04 pm | [comment link]
13. Br. Michael wrote:

The article is still misleading.  It constantly confuses insurance with banking.  More over if you go to the FDIC web site you will learn that FDIC insurance does not cover all products offered by an FDIC bank.  For example:

What Is Insured?
You are probably familiar with the traditional types of bank accounts - checking, savings, trust, certificates of deposit (CDs), and IRA retirement accounts - that are insured by the FDIC. Banks also may offer what is called a money market deposit account, which earns interest at a rate set by the bank and usually limits the customer to a certain number of transactions within a stated time period. All of these types of accounts generally are insured by the FDIC up to the legal limit of $250,000 and sometimes even more for special kinds of accounts or ownership categories. For more information on deposit insurance see FDIC brochure “Your Insured Deposits.”
What Is Not Insured?
Increasingly, institutions are also offering consumers a broad array of investment products that are not deposits, such as mutual funds, annuities, life insurance policies, stocks and bonds. Unlike the traditional checking or savings account, however, these non-deposit investment products are not insured by the FDIC.

http://www.fdic.gov/consumers/consumer/information/fdiciorn.html

And the article does say:  “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.”  Despite the qualifier “In tiny print….” Prudential did disclose that there was no FDIC protection on this insurance company product.

And a lot of what you are concerned about would apply if the insurance company had cut her a check for $400,000.  My final point is that we don’t know that all this was not disclosed, because she admits that she didn’t read the paperwork.  We don’t even know if the reporter read the paperwork.

The bottom line is that I don’t trust the reporting.  There may be something here, but I don’t think the reporter has given us all the facts and the article is clearly slanted to reveal the “big bad insurance company that steals from little old ladies”.  There is this curious item:

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.

Why did this happen?  Did she even inquire as to why the drafts were rejected?  Did she contact the insurance company?  Did the salesman tell her why the check was rejected?  Why did she write a second draft after the first?  When did she realize that this was in fact an investment account?  Did she ever read the company provided material?  The article does not say.

July 30, 6:33 am | [comment link]
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