Insurance companies find way to invest benefit money even after policyholders die
Wednesday, July 28, 2010
Here’s how I thought life insurance worked:
1) I buy a life insurance policy.
2) I pay my premiums under the terms of the policy.
3) I die.
4) My beneficiary receives a check for the benefit amount specified in the policy.
Silly me. I forgot the insurance company’s purpose is to make money, even if it means my beneficiary doesn’t receive the benefit right away.
Bloomberg Markets reporter David Evans offers thorough details, after a six-month investigation, of how some insurance companies hold onto the death benefit unless requested by the beneficiary — even though the beneficiary is entitled to the entire amount right away — and those companies continue to earn interest on the benefit money until it is paid out. This behavior, while inexcusable, is completely legal. And it’s been going on for some time now, ever since the nation’s largest life insurer, MetLife, came up with the idea 25 years ago.
Evans opens his report with an example of how these “retained-asset accounts” work:
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.
Cindy Lohman did not attempt to take any of the money to which she was entitled for six months. During that time Prudential was earning money by investing the benefit amount at a higher interest rate than it was paying Lohman. The interest rate it was paying Lohman was less than half what Lohman could have been earning herself by investing the amount — to which she was entitled — in an FDIC-insured bank account.
Then when Lohman tried to use one of the “checks” she was sent, to buy a bed, she found she couldn’t because it wasn’t actually a “check,” since Prudential isn’t actually a “bank,” nor had Prudential put the money in a bank for her to withdraw.
Evans quotes Jeffrey Stempel, an insurance law professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas:
“It’s institutionalized bad faith,” he says. “In my view, this is a scheme to defraud by inducing the policyholder’s beneficiary to let the life insurance company retain assets they’re not entitled to. It’s turning death claims into a profit center.”
And there’s a lot of money involved, as Evans writes:
Insurers are holding onto at least $28 billion owed to survivors, according to three firms that handle retained-asset accounts for about 130 life insurance companies. There are no public records showing how much companies are holding in these accounts.
Evans goes on to write about how the insurance companies may be running afoul of federal bank laws, although apparently there are no legal challenges right now.
Insurance companies defend “retained-asset accounts” with mushmouthed assertions like, “For some families, the account is the difference between earning interest on a large amount of money and letting it sit idle,” or talk about how such accounts give beneficiaries “security, peace of mind and time to make an informed decision — while earning interest in the interim.” (Never mind beneficiaries have the right to make their own decisions about whether the money should sit idle or how it should be used, and would be earning more interest if they had the money to which they were entitled and chose to invest it.)
Or this, from the American Council of Life Insurers: “Retained-asset accounts provide a significant benefit to family members who are dealing with the emotional loss of a loved one. Financial matters may not be the first thing on their minds and retained-asset accounts provide a secure place for life insurance policy proceeds to be held until the money is needed.”
Which could be translated as: Financial matters may not be the first thing on their minds, which means it may take a while for them to get around to asking us for the money we’ve promised to pay them.
Pennsylvania insurance commissioner Joel Ario cut through the mush when he told Evans, “I haven’t heard a plausible argument about why these accounts are better for the consumer.” Yet his state does not, at this time, have any rules regarding these accounts.
A federal appeals court also saw through the mush in the one case that has reached that level.
After a federal judge in Boston dismissed a policyholder suit claiming that Chattanooga, Tennessee-based insurer Unum Group was stealing account earnings from survivors, the U.S. Court of Appeals for the First Circuit overruled the lower court in 2008. It reinstated the case.
“The euphemistically named ‘Security Account,’ accompanied with a checkbook, was no more than an IOU which did not transfer the funds to which the beneficiaries were entitled out of the plan assets,” the three-judge panel wrote.
One more outrageous piece of news in Evans’ story: The VA official who oversees the life insurance program that pays benefits to Cindy Lohman and other family members of members of the military thought Prudential was running the program just to be “good guys” and wasn’t making a dime from it. When he found out about the delayed payments, he asked company officials how much they were holding onto to which beneficiaries were entitled, and how much the company was earning off that money — and company officials refused to tell him, saying the information is proprietary.
But that same VA official admitted, “Maybe I didn’t ask enough questions,” when Prudential pitched the “checkbook” payouts in 1999.
Beneficiaries who receive “checkbooks” are entitled to make a claim for the entire amount they are due right away. Evans reports only six states require insurance companies to tell beneficiaries that.
“It’s flown under the radar,” insurance law professor Jeffrey Stempel said about “retained-asset accounts.” Let’s hope David Evans’ reporting will put the matter on the radar of all fifty state insurance commissioners. The VA didn’t take long to respond; within hours of the publication of Evans’ story, VA officials called for a full investigation.
UPDATE 7-29-10: New York attorney general Andrew Cuomo has begun an investigation into this practice.