A recent report that suggested insurance companies were taking advantage of the grieving families of fallen soldiers sparked outrage. A closer look reveals the situation isn’t as simple as it seems, which is why two investigations announced after the report could be helpful.
A Bloomberg News story, published in the weekend Bangor Daily News, said major insurance companies have been holding back death benefits from the families of fallen soldiers. Instead of paying a lump sum, the report said, the insurance firms have been keeping the money in their own accounts, paying noncompetitive interest rates to survivors and giving them misleading guarantees about the safety of the funds while the companies make big profits on the investments.
The U.S. Department of Veterans Affairs immediately announced it had begun its own investigation into the issue. New York’s Attorney General Andrew Cuomo subpoenaed MetLife Inc. and Prudential Financial Inc., calling the practice “shocking and plain wrong.” Maine’s 1st District Rep. Chellie Pingree, a Democrat, called the practice “unbelievable” and “disgusting,” urging insurance companies to turn over any held-back insurance payments to the families and pay them any additional interest that had been earned on the money.
Cooler voices also spoke up. Two life insurance analysts, Randy Binner and Kevin Barker at FBR Capital Markets, a big investment banking firm, questioned the outcry. “We find the very sharp and rapid regulatory response to this surprising and apparently unfounded,” they wrote in a note to investors, according to MarketWatch. They said life insurers have been setting up accounts for beneficiaries as a long-established option for consumers, who can choose to take a lump sum in cash instead.
In fact, they added, the practice is what insurers do every day: “Investing funds ultimately due to customers in the general account to earn a spread over what is paid out quite simply describes the business of insurance.”
The insurance companies say families of fallen soldiers may be glad to have the death proceeds held for them at an emotional and confusing time. The current interest rate is 0.5 percent — more than some bank checking account rates but less than can be negotiated for large amounts. Unsophisticated people may feel shielded from making unwise major purchases or falling victim to risky investments.
Bloomberg quotes Gerry Goldsholle, who invented the retained-asset accounts while at MetLife, as saying the company makes between$100 million and $300 million a year from investment returns on the death benefits it holds.
If the investigations find that the companies are putting their own profits ahead of the benefits due to families, changes should be recommended.