October 25, 2010

Servicemen’s Group Life Insurance: Profit Center?

Sidebar to "Life Insurers Under Fire"

According to a Bloomberg News report, there’s really no need for an insurance company to be involved at all in paying out death benefits to deceased servicemembers’ families—at least in the opinion of the American Legion. What has developed is a moneymaking opportunity for insurers—a “business transaction,” in the words of John Corcoran, an American Legion executive who testified at a Sept. 9 hearing in 1965—instead of the federal government fulfilling its obligations to those who give their lives in service. The Legion was concerned that Congress, on the verge of creating Servicemen’s Group Life Insurance (SGLI), was handing over “the responsibility of the government” to insurers when it was the government’s obligation to “indemnif[y] the lives of our servicemen and provid[e] a degree of protection to their parents, widows and orphans … .”

What happened was that Congress did indeed create SGLI, even though the government “set and collect premiums, d[id] record keeping and pa[id] for war deaths.” Pre-Vietnam, the government was its own insurance company; it paid death benefits for each war—WWI, WWII, and Korea—through separate programs.

But in 1965 it did things differently. At the suggestion of the insurance industry it adopted SGLI, which was based on the insurance program set up for nonmilitary government employees. And because insurers were worried about the potential death toll in Vietnam, it was agreed that the government would pay the full costs of death benefits for those killed in action, with the money coming from deductions from soldiers’ pay.

It works this way: Servicemembers have deductions taken from their pay for SGLI. The government collects the money and sends it on to Prudential (which has held the no-bid contract since its inception), which invests it, usually in bonds, and makes money from it. When a claim comes in, the survivor is sent either a lump-sum check or, more likely, an Alliance Account checkbook (the RAA). The money that remains in Prudential’s accounts continues to collect interest, some of which is paid out to the beneficiaries; the majority of the interest remains with Prudential.

Currently, 95% of survivors ask for lump-sum payments.

But two things have struck a nerve in this case. The first is that the insurer is making that money off the deaths of servicemembers—soldiers killed in the line of duty.

And the second is that, if the beneficiary of a servicemember asks for a lump sum and instead is sent a “checkbook,” that doesn’t seem fair either; a lump sum, to most people, is a check for the full amount.

The American Legion’s position on the issue has not changed. Indeed, Peter Gaytan, executive director, said to Bloomberg, “We have to overhaul the system so nobody can make profits off soldiers who died in action.”

>> Return to "Life Insurers Under Fire"
 

Reprints Discuss this story
This is where the comments go.