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July 28, 2010 at 08:00 PM
WASHINGTON BUREAU — Life insurers are defending themselves against allegations that a system for paying death benefits through checkbooks, rather than in the form of lump sums, hurts the beneficiaries.
Some life insurers, including the insurers that run the group life programs for military personnel and federal civilian employees, use “retained asset accounts” to hold life policy proceeds. The accounts are not bank accounts insured by the Federal Deposit Insurance Corp. (FDIC), and the interest rates paid are often lower than the rates paid by commercial banks.
Bloomberg Markets magazine is promoting an article, “Fallen Soldiers’ Families Denied Cash As Insurers Profit,” that calls the retained asset accounts “a secret profit center for the life insurance industry.” NPR has also covered the story.
U.S. insurers hold about $28 billion in 1 million insurer-managed death benefit accounts, and the insurers earn the equivalent of a corporate bond rate on the cash in the accounts, according to Bloomberg.
Insurers and state regulators say retained asset accounts are legal, Bloomberg says, but the magazine found legal experts who question whether holding death benefits in non-insured accounts is legal, and insurers may not explicitly tell beneficaries that funds are being held in something other than an FDIC-insured account, Bloomberg says.
Bloomberg cites the story of a 24-year-old Army sergeant who was killed by a roadside bomb in Afghanistan. A unit of Prudential Financial Inc., Newark, N.J. (NYSE:PRU), held the $400,000 death benefit in a general corporate account and earned investment income on the cash. A Prudential Alliance Account paid the mother of the sergeant an interest rate of 1% in 2008, while Prudential collected a 4.8% return on its corporate funds, Bloomberg says.
The American Council of Life Insurers (ACLI), Washington, says published reports have cast a negative light on retained asset accounts and given the benefits the accounts provide short shrift.
Life insurers usually let beneficiaries choose between using a retained asset account, getting a lump-sum payment, or getting a series of payments, and the retained asset account option can be a useful one for beneficiaries who are facing the loss of a loved one, the ACLI says.
“Not surprisingly, financial matters may not be the first thing on their minds, and
