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Life Health > Life Insurance

Death benefit payout system outrage unjustified

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Ooh, those evil insurance companies are at it again! Or so some in the mainstream media would have consumers believe. And surprise – a couple of politicians were quick with the knee-jerk reactions to condemn the insurance companies, too.

Upon closer inspection, this seems to be much ado about nothing.

Last week some life insurance companies – apparently still with big targets painted on their chests – came under fire when Bloomberg Markets magazine posted an article on July 28 titled, “Fallen Soldiers’ Families Denied Cash As Insurers Profit.”

The article, which gained additional traction when it was picked up by NPR and The New York Times, took life insurers to task for perceived injustices in a longstanding common and legal method of paying group life insurance death benefits – retained asset accounts. With Prudential’s Alliance Account, which is mentioned in the article, the insurer opens an interest-bearing account with a checkbook in the beneficiary’s name the next business day.

The article quotes Jeffrey Stempel, an insurance law professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas, saying, “the checkbook system cheats the families of the deceased. It’s institutionalized bad faith. 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.”

The article goes on to say, “Since 1999, the Veterans Affairs Department has allowed Prudential to send survivors checkbooks tied to its Alliance Account. Prudential’s policies promise either a lump sum payout or 36 monthly payments. About 90 percent of survivors choose to receive the full amount upfront. When they do, they don’t get a check; they get a checkbook.”

OK. So they get a checkbook instead of a check for the lump sum. But that’s where the article is misleading and stirs up outrage where there should be no outrage: It fails to mention that there is nothing that requires the beneficiary to leave the death benefit proceeds in the account for any amount of time at all. It says right in Prudential’s own Alliance Account brochure – which was easy to find online – “you can leave the funds in the account for as long as you wish or access any or all of your funds. At any time, you may transfer some or all of your account balance to another settlement option at no cost.”

Another information sheet I found said, “You can begin using Alliance as soon as the account is opened. You can leave the money in the account, withdraw the entire amount or write checks against the balance.”

So what’s the big deal? If a beneficiary decides to leave the money in the account, so be it that the insurance company makes a bigger share of interest on the money than the beneficiary while the money is left – voluntarily – with the insurance company. If the beneficiary doesn’t want that to happen, by all means withdraw the money!

Worried because the accounts aren’t insured by the FDIC? Withdraw the money!

Now you have politicians jumping in, like Rep. Debbie Halvorson (D-Ill.) and Sen. Charles Schumer (D-N.Y.), who are hastily drafting legislation. Halvorson brought in legislation July 30 that would require life insurers to inform recipients how much the insurer stands to make from holding the funds and how their cash will be spent. Schumer is drafting legislation that would require life insurance policies for soldiers and other federal workers to include a default lump-sum payment.

Am I the only one who thinks that given the multitude of challenges facing Congress right now, this is completely unnecessary? I’d love to hear your thoughts on the issue via the comment box below.


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