NEW YORK--()--Millions of Americans are being duped by life insurance companies that have figured out a way to hold onto death benefits owed to families, according to a six-month investigation appearing in the September 2010 issue of BLOOMBERG MARKETS® magazine, on newsstands worldwide starting August 16, 2010.
“The feedback from customers has been overwhelmingly positive”
MetLife and Prudential lead the way in making hundreds of millions of dollars in secret profits every year on money that belongs to relatives of those who die. Among the people being tricked are parents and spouses of U.S. soldiers killed in battle in Iraq and Afghanistan.
Survivors of service men and women are told they'll get a $400,000 life insurance payout. They don't. Instead, Prudential keeps their money. Families are surprised when they receive what looks like a checkbook. Prudential promises to hold the money in safekeeping for as long as families would like, saying it will pay them 0.5 percent interest.
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What Prudential doesn't say is that it’s keeping survivors’ money in Prudential’s corporate investment account, where the company is earning five to 10 times as much as it pays to families. The so-called checks have the name JPMorgan Chase printed on them. But the money isn't in a bank and it's not protected by FDIC insurance. Those facts aren’t made clear to the survivors.
Nor are families told that they could earn more than twice as much interest by opening FDIC-insured money market accounts at banks across the country. Families of fallen soldiers say they often don't want to touch the “checkbooks” because they view them as “blood money” -- cash in return for their sacrificed child. As a result, Prudential holds the death benefits, often for more than a year.
How big is the unregulated quasi-banking system operated by insurers? There are now more than 1 million of these accounts holding more than $28 billion at 130 life insurance companies.
“I'm shocked,” says Cindy Lohman, a Maryland woman whose son, Ryan, was killed in Afghanistan in 2008. “It’s a betrayal. It saddens me as an American that a company would stoop so low as to make a profit on the death of a soldier.”
Millions of Americans have unwittingly been placed in the same position by their insurance companies. The practice of issuing so-called “checkbooks” to survivors, instead of paying out lump sums, extends well beyond the military.
In the past decade, this ruse has become standard operating procedure in an industry that touches virtually every American: there are more than 300 million active life insurance policies in the U.S. MetLife alone holds $10 billion in death benefit money that belongs to grieving families. MetLife makes $100 million to $300 million a year on money that belongs to survivors.
Insurance companies say they're providing their customers a service. Prudential death benefit accounts are helpful to families of soldiers, says company spokesman Bob DeFillippo. “For some families, the account is the difference between earning interest on a large amount of money and letting it sit idle,” he says. MetLife spokesman Joseph Madden says his company’s customers are very happy with the system. “The feedback from customers has been overwhelmingly positive,” he says. “We afford beneficiaries security, peace of mind and time to make an informed decision -- while earning interest in the interim.”
“It's outrageous that they're profiting off other people's grief,” says Mark Umbrell in Doylestown, Pennsylvania. His 26-year-old son Colby, an Army Airborne Ranger who earned a Bronze Star and a Purple Heart, was killed in Iraq in May 2007. Umbrell was among those who got a “checkbook” account. “I think we're being taken,” he says.
The question for Umbrell, Lohman and a million others with these accounts is whether anyone will hear their cries. State bank regulators say if there are to be any changes, they should be made by insurance departments. Officials at those state agencies often say they don't even understand what the insurance industry is doing with these “checkbook” payouts. “It’s flown under the radar,” says insurance law professor and author Jeffrey Stempel. “Regulators have not done their job.”
Until public officials wake up, the bereaved will remain a secret profit center for the life insurance industry.