Insurers hold billions in federal death benefits in unprotected accounts

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By David Evans
Bloomberg News
Sunday, August 1, 2010

The package arrived at Cindy Lohman's home in Great Mills, just two weeks after she learned that her son, Ryan P. Baumann, a 24-year-old Army sergeant, had been killed by a bomb in Afghanistan. It was a thick, 9-by-12-inch envelope from Prudential Financial, which handles life insurance for the Department of Veterans Affairs.

Inside was a letter from Prudential about Ryan's $400,000 policy. And there was something else that looked like a checkbook. The letter told Lohman that the full amount of her payout would be placed in a convenient interest-bearing account, allowing her time to decide how to use the benefit.

"You can hold the money in the account for safekeeping for as long as you like," the letter said.

In tiny print, in a disclaimer that Lohman says she didn't notice, Prudential disclosed that what it called its Alliance Account was not guaranteed by the Federal Deposit Insurance Corp.

Lohman, 52, left the money untouched for six months after her son's August 2008 death.

"It's like you're paying me off because my child was killed," she said. "It was a consolation prize that I didn't want."

As time went on, she said, she tried to use one of the "checks" to buy a bed, and the salesman rejected it. That happened again this year, she said, when she went to a Target store to buy a camera on Armed Forces Day, May 15.

Lohman, a public health nurse who helps special-needs children, said she had always believed that her son's life insurance funds were in a bank insured by the FDIC. That money -- like $28 billion in 1 million death-benefit accounts managed by insurers -- wasn't actually sitting in a bank.

It was being held in Prudential's general corporate account, earning investment income for the insurer. Prudential paid survivors such as Lohman 1 percent interest in 2008 on their Alliance Accounts, while it earned a 4.8 percent return on its corporate funds, according to regulatory filings.

"I'm shocked," Lohman said, breaking into tears as she learned how the Alliance Account works. "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. Is there anything lower than that?"

Millions of bereaved Americans have unwittingly been placed in the same position by their insurance companies. The practice of issuing what they call "checkbooks" to survivors, instead of paying them lump sums, extends well beyond the military.

In the past decade, these so-called retained-asset accounts have become standard operating procedure in an industry that touches nearly every American. There are more than 300 million active life insurance policies in the United States, and the industry holds $4.6 trillion in assets, according to the American Council of Life Insurers.


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