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Retained Asset Account Frenzy Continues

By Allison Bell

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Prudential Financial Inc. says it believes the checking account payment option it has offered military life insurance beneficiaries has been good for beneficiaries.

“It is important that the beneficiaries of our fallen service men and women are treated with dignity and respect during a very difficult time,” Prudential Chairman John Strangfeld says in a statement. “Given the questions raised over the life insurance program we administer for the Department of Veterans Affairs, we welcome an opportunity to address the concerns and to set the record straight.”

Bloomberg Markets recently created a flood of about 2,000 news articles, or reprinted versions of articles, by publishing an article about retained asset accounts (RAA) – vehicles life insurers use to hold beneficiaries’ benefits until the beneficiaries withdraw cash with checks or payment cards.

Supporters say life insurers that offer retained asset accounts usually let beneficiaries choose between using the accounts and getting lump-sum payments, and they say retained asset accounts can give grieving beneficiaries time to mourn before making major financial decisions.

The critics cited in the Bloomberg Markets article say life insurers earn high returns on the cash and pay beneficiaries low interest rates, even though the accounts are not insured by the Federal Deposit Insurance Corp. (FDIC). In some cases, the critics say, the insurers may not have given the beneficiaries any clear indication that the funds would be held in something other than an FDIC-insured bank.

The Bloomberg Markets article focused on retained asset account programs at Prudential Financial Inc., Newark, N.J. (NYSE:PRU), which runs the Servicemembers’ Group Life Insurance (SGLI) program, and MetLife Inc, New York (NYSE:MET), which runs the group life program for federal civilian employees.

New York Attorney General Andrew Cuomo said Thursday that he has sent subpoenas about the accounts to Prudential and MetLife.

Cuomo’s office now has expanded the investigation to include Genworth Financial Inc., Richmond, Va. (NYSE:GNW); Unum Group Corp., Chattanooga, Tenn. (NYSE:UNM); New York Life Insurance Company, New York; Northwestern Mutual Life Insurance Company, Milwaukee; Guardian Life Insurance Company of America, New York; and an insurance unit of AXA S.A., Paris, according to someone familiar with the investigation.

Although Prudential serves as the administrator for the SGLI program and a related Veterans’ Group Life Insurance program, 25 other insurers help support the program by acting as reinsurers, according to the SGLI program 2009 annual report. The SGLI and VGLI programs took in a total $1 billion in premium revenue in 2009 and paid $1.1 billion in claims.

Prudential says the critics of the SGLI retained asset accounts are missing some important points.

Prudential says the following:

  • Beneficiaries are vulnerable targets for abusive sales tactics. We believe that the Alliance Account takes the pressure off beneficiaries to do something with the money–a situation that may lead to imprudent and expensive investment decisions.
  • Our program provides a secure, conservative option and access to an independent advisor.
  • Beneficiaries who feel confident about making decisions right away have full access to their funds, which may be deposited in the financial institution of their choice, with funds earning interest until presented for payment.
  • We do not think it makes sense to force people to make decisions in a difficult and complex financial environment during a very emotional time in their lives.
  • Beneficiaries who find a better interest rate can move the money by simply writing a draft.
  • Beneficiaries receive the entire amount they are owed plus interest in their account. Prudential does not in any way take money from beneficiaries.
  • More than 40,000 Prudential Alliance Account drafts cleared last year. We receive few complaints from beneficiaries about difficulties.
  • It is “apples and oranges” to compare the rate paid n the Alliance Account to either the historical rate on our total portfolio or to a rate that requires investing in long-term assets.
  • Prudential pays a competitive rate compared to other options that involve funds that are readily available and do not put principal at risk.
  • The Alliance Account assets constitute less than 1% of our general gccount assets, and the rate that we earn on the Alliance Account assets is not comparable to the rate earned on the General Account as a whole.
  • On the subject of safety, while our Alliance Accounts are not FDIC insured (a fact that is fully disclosed in our material), these accounts are protected by state guaranty funds that provide protection of at least $250,000 in most states.

THE NAIC

The National Association of Insurance Commissioners, Kansas City, Mo., developed a retained asset account model in 1994.

NAIC President Jane Cline says insurers created the accounts because consumers asked them to.

“The NAIC is re-reviewing the disclosure requirements associated with RAA and is developing a consumer alert to help policyholders better understand the terms of these kinds of settlements,” Cline says. “Regulators are also reviewing the transaction requirements/terms for the ‘checkbook’ usage associated with these types of policies.

“Depending on how an insurance company manages its RAA program, these accounts may not be FDIC insured. However, all states have a life insurance guaranty fund to protect policyholders.

“In addition, all state insurance departments maintain active consumer assistance programs to address consumer complaints, and RAAs have generated few if any complaints. Any consumer who is confused, feels they have been mistreated regarding these types of settlements, or believes there may have been a misrepresentation of the settlement terms should contact their state insurance department.”

PRUDENTIAL IN THE WORLD WARS

Prudential has had a long history of paying soldiers’ life claims during time of war. Before 1914, it had written many policies that had clauses excluding coverage for wartime deaths, but Earl Chapin May and Will Oursler write in The Prudential, a company history published in 1950, that Prudential waived the wartime death exclusion on all such policies and ended up paying $7 million on about 23,000 policies that had insured individuals who died in the war.

During World War II, Prudential paid about $70 million to the beneficiaries listed on about 100,000 policies, according to May and Oursler.

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