Subject: Fw: Fallen Soldiers’ Families Denied Cash Payout as Insurers Profit
From: "Devon Archer" <[email-masked]>
To: <[email-masked]>
Date: Wed, 28 Jul 2010 09:48:53 -0700

FYI...DJ is one of the head traders at Ziff that's piloting Vide with us.  He's an Navy Seal and concerned about veteran issues as you can imagine.  I know he'd appreciate you knowing about this injustice.

----- Original Message -----
From: DJ Haley <[email-masked]>
To: Chris Heinz; [email-masked] <[email-masked]>; [email-masked] <[email-masked]>; Devon Archer; [email-masked] <[email-masked]>; [email-masked] <[email-masked]>; [email-masked] <[email-masked]>; [email-masked] <[email-masked]>; Dan Senor; DJ Haley <[email-masked]>; [email-masked] <[email-masked]>
Sent: Wed Jul 28 09:39:01 2010
Subject: Fallen Soldiers’ Families Denied Cash Payout as Insurers Profit

Something that should certainly evoke congressional attention (and
seemingly hasn't according to this article).   Truly sad and despicable
instance of "institutionalized bad faith".

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Fallen Soldiers’ Families Denied Cash Payout as Insurers Profit

July 28 (Bloomberg) -- The package arrived at Cindy Lohman’s home in Great
Mills, Maryland, just two weeks after she learned that her son, Ryan, a
24-year-old Army sergeant, had been killed by a bomb in Afghanistan. It was
a thick, 9-inch-by- 12-inch envelope from Prudential financial Inc., 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, which 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.,
Bloomberg Markets magazine reports in its September issue. 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 says. “It
was a consolation prize that I didn’t want.”

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

‘I’m Shocked’

Lohman, a public health nurse who helps special-needs children, says 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 like 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,” says Lohman, breaking into tears as she learns 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.

Touching Americans

In the past decade, these so-called retained-asset accounts have 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., and the industry holds $4.6 trillion in assets, according to the
American Council of Life Insurers. Insurance companies tell survivors that
their money is put in a secure account. Neither Prudential nor MetLife
Inc., the largest life insurer in the U.S., segregates death benefits into
a separate fund. Newark, New Jersey-based Prudential, the second-largest
life insurer, holds payouts in its own general account, according to
regulatory filings. New York-based MetLife has told survivors in a standard
letter: “To help you through what can be a very difficult, emotional and
confusing time, we created a settlement option, the Total Control Account
Money Market Option. It is guaranteed by MetLife.”

No FDIC Insurance

The company’s letter omits that the money is in MetLife’s corporate
investment account, isn’t in a bank and has no FDIC insurance. “All
guarantees are subject to the financial strength and claims-paying ability
of MetLife,” it says. Both MetLife, which handles insurance for nonmilitary
federal employees, and Prudential paid 0.5 percent interest in July to
survivors of government workers and soldiers. That’s less than half of the
rate available at some banks with accounts insured by the FDIC up to
$250,000. Bank of New York Mellon Corp. handles the paperwork and monthly
statements for customers with MetLife “checking accounts.” The insurance
company, not the bank, most recently reported holding about $10 billion in
death benefits, in 2008.  The “checkbook” system cheats the families of
those who die, says Jeffrey Stempel, an insurance law professor at the
William S. Boyd School of Law at the University of Nevada, Las Vegas, who
wrote ‘Stempel on Insurance Contracts’ (Aspen Publishers, 2009).

‘Bad Faith’

“It’s institutionalized bad faith,” he says. “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.”  Prudential’s Alliance Account is 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. Prudential follows the
law, he says.

“We fully and regularly disclose the nature and terms of the account to
account holders,” DeFillippo says. “We make it clear that the money can be
withdrawn at any time by simply writing a draft.” Metlife spokesman Joseph
Madden says his company’s customers are very happy with the Total Control
Account.

‘Overwhelmingly Positive’

“The feedback from TCA customers has been overwhelmingly positive,” he
says. “The TCA affords beneficiaries security, peace of mind and time to
make an informed decision -- while earning interest in the interim.”

Madden says the company was paying some survivors 0.5 percent in July while
some others got 1.5 percent or 3 percent, depending on the age and origin
of insurance accounts. The accounts don’t violate any laws, Madden says,
and are authorized by New York state insurance law.

Insurers are holding onto to at least $28 billion owed to survivors,
according to three firms that handle retained-asset accounts for about 130
life insurance companies. There are no public records showing how much
companies are holding in these accounts. The “checks” that Cindy Lohman
wrote, the ones rejected by retailers, were actually drafts, or IOUs,
issued by Prudential. Even though the “checks” had the name of JPMorgan
Chase & Co. on them, Lohman’s funds weren’t in that bank; they were held by
Prudential.

Federal Bank Law

Before a check could clear, Prudential would have to send money to
JPMorgan, bank spokesman John Murray says. Insurance companies -- in
addition to holding onto the money of survivors, paying them uncompetitive
interest rates and giving them misleading guarantees -- may be violating a
federal bank law. A 1933 statute makes it a felony for any company to
accept deposits without state or federal authorization.

That means only banks or credit unions can accept deposits, says Arthur
Wilmarth, a professor at George Washington University Law School in
Washington who has testified before Congress about banking regulations. If
a prosecutor pressed an insurance company, retained-asset accounts could be
outlawed because insurers say they deposit money into these accounts and
don’t have bank charters or banking regulation, Wilmarth  aays. MetLife
also offers its own version of certificates of deposit.

“If it swims, quacks and flies like a duck, the court could decide that it
is indeed a duck,” he says. “You then potentially could have a criminal
violation.”

Potential Bank Run

This unregulated quasi-banking system operated by insurers has none of the
protections of the actual banking system. Lawrence Baxter, a professor at
Duke University School of Law in Durham, North Carolina, says the potential
exists for a catastrophe. If one insurer is unable to meet its obligations
on retained-asset accounts, people could lose faith in other companies and
demand immediate payment, triggering a panic, says Baxter, who has
consulted with federal agencies on financial regulation. The government
established the FDIC in 1933 after frantic depositors tried to pull their
money from banks. The federal government has no such program for
death-benefit accounts. “There’s more than $25 billion out there in these
accounts,” Baxter says. “A run could be triggered immediately by one
insurance company not being able to honor its payout. The whole point of
creating the FDIC was to put an end to bank runs.”

No Federal Regulation

The sweeping financial regulatory legislation signed by President Barack
Obama on July 21 doesn’t address retained-asset accounts. It creates a new
federal insurance office, which won’t be a regulator. It will collect
information, monitor the industry for systemic risk and consult with state
insurance regulators.

An industry with $19.1 trillion in potential liabilities will remain
unregulated by the federal government. In 2008, insurers approved claims
totaling $60 billion in death benefits, according to the life insurance
council.

The federal government doesn’t even regulate the life insurance it
supplies, via MetLife, to its own employees in a rogram called Federal
Employees’ Group Life Insurance. As the VA does for soldiers, the U.S.
Office of Personnel Management sends handbook to nonmilitary government
workers -- some 4 million active employees and retirees.

The handbook says their life insurance policies automatically pay out death
benefits in the form of a “money- market-account checkbook.” The 217-page
handbook omits that the money isn’t FDIC insured and will stay with MetLife
until someone writes a “check.”

‘Unfair Advantage’

This lack of disclosure is unconscionable, says Harvey Goldschmid, a
commissioner of the U.S. Securities and Exchange Commission from 2002
to 2005. “I can’t imagine why bank regulators haven’t been requiring a
prominent ‘no FDIC insurance’ disclosure,” says Goldschmid, who’s now a law
professor at Columbia University in New York. “This system works very badly
for the bereaved. It takes unfair advantage of people at their time of
weakness.”

The closest relative to retained-asset accounts may be money-market mutual
funds, which are pools of cash invested in short-term debt securities.

Money Market Rules

The SEC requires fund companies to warn investors that money market funds
don’t have FDIC insurance. It also mandates that fund managers provide a
prospectus, that they invest in specific types of safe debt and that they
post a detailed schedule of their investments monthly on their websites.
Insurers’ retained-asset accounts have none of those regulatory
protections.

A June 2009 MetLife standard condolence letter to survivors leaves out that
accounts aren’t in a bank and aren’t federally insured. In June 2010, 25
years after MetLife invented retained- asset accounts, the company released
a customer agreement that does disclose that retained assets aren’t in a
money market account nor in a bank and that they have no FDIC insurance.

“The assets backing the Total Control Accounts are maintained in MetLife’s
general account and are subject to MetLife’s creditors,” the agreement
says. That language contradicts the federal employee handbook, which says
survivors get a money market account.

Gerry Goldsholle, the man who invented retained-asset accounts, says
MetLife makes $100 million to $300 million a year from investment returns
on the death benefits it holds. A former president of MetLife Marketing
Corp., Goldsholle, 69, devised the accounts in 1984. He’s now a lawyer in
private practice in Sausalito, California.

‘This Is Crazy’

Goldsholle says he pondered the billions of dollars of death-benefit
proceeds the company paid out each year. “I looked at this and said this is
crazy,” says Goldsholle, who left the firm in 1991. “What are we doing to
retain some of this money? It’s very expensive to bring money in the front
door of an insurance company. You’re paying very large commissions and
sales expenses.”

So he came up with a way for MetLife to hold onto death benefits. “The
company would win because we would make a nice spread on the money,”
Goldsholle says, while customers would earn interest on their accounts.
MetLife, he says, can earn 1 to 3 percentage points more from its
investment income -- mostly from bonds -- than it pays out to survivors.

Misconceptions

The accounts Goldsholle invented have spread much faster than the ability
of state regulators to track them -- or even to understand how they work.
Ted Hamby, North Carolina’s deputy insurance commissioner for life and
health, says he believes retained-asset accounts have FDIC  protection.
“Whatever money is on deposit in that checking account will be insured, up
to the limits of the FDIC,” he says. He’s wrong. No retained-asset accounts
have FDIC coverage.

In Connecticut, where 106 insurance companies are based, state insurance
department manager for market conduct Kurt Swan also says that
retained-asset accounts are kept in banks, with FDIC coverage. “I think
they’re just trying to offer some flexibility to the beneficiary,” he says.
Swan and his colleague, William Arfanis, the department’s principal
financial examiner, both say the insurers don’t profit from the
retained-asset accounts. That too is wrong. The companies do earn
investment gains on death benefits.

Some Rules

Just six states had any rules for retained-asset accounts as of July 2009,
according to the National Association of nsurance Commissioners. Arkansas,
Colorado, Kansas, Nevada, North Carolina and North Dakota require insurers
to disclose fees and interest rates and to tell survivors they may withdraw
all of the money by writing a single check.  Maryland, which isn’t on the
NAIC list, also has rules. Pennsylvania Insurance Commissioner Joel Ario,
whose state has no rules for retained-asset accounts, says he has asked his
staff to prepare a regulation forbidding insurance companies from using
such accounts as the default method of paying a death claim. "I haven’t
heard a plausible argument about why these accounts are better for the
consumer,” Ario says. If state insurance regulators have paid scant
attention to retained-asset accounts, state bank regulators have taken an
even more hands-off approach.

‘Not Drawn Attention’

“Quite honestly, we deal with issues that our members want us to deal
with,” says Michael Stevens, senior vice president for regulatory policy at
the Washington-based Conference of State Bank Supervisors. “This is not one
that has drawn their attention.”

Three companies have not only noticed but have also profited by handling
retained-asset accounts for insurers. Open Solutions Inc., based in
Glastonbury, Connecticut, oversees 400,000 accounts for 67 insurance
companies. Open Solutions sends out “checkbooks,” prints periodic
statements and computes accrued interest for accounts with total deposits
of $10 billion, says Jay Woldar, director of sales and account management
at Open Solutions.

One of its competitors, Bank of New York Mellon, administers more than
500,000 retained-asset accounts holding a total of $14 billion,  including
MetLife’s retained assets. Chicago-based Northern Trust Corp. handles about
$4 billion in 125,000 accounts, spokesman John O’Connell says. Survivors
generally don’t touch these accounts immediately.

Accounts Stay Opened

“About 40 percent of the money stays in for more than a year,” Woldar says.
Insurers can have use of survivors’ money for years, even decades, says
Randi Lichtenstein, a product line manager at Bank of New York.  “They can
stick around for quite a while,” she says. “There are accounts that all
insurance companies have on these platforms that go back 10, 15, 20 years.”

MetLife’s Madden says most of its customers’ retained-asset accounts are
closed within one year. About 28 percent of survivors of soldiers and
veterans keep their retained-asset accounts open for more than two years,
the VA says. During a routine audit completed in 2004, the New York
State Insurance Department found that 1,476 retained-asset accounts, worth
a total of $33.5 million, at Hartford, Connecticut-based Phoenix Life
Insurance Co., had been dormant for more than three years.

In New York, funds in an account that remains dormant for more than three
years may be turned over to the state. Phoenix spokeswoman Alice Ericson
says the company now has a policy of sending letters to people whose
accounts have been inactive for two years.

Inactive Accounts

Almost one-third of the 6,890 retained-asset accounts run by Mony Life
Insurance Co. were inactive for more than three years, New York auditors
found in 2002. Mony is now owned by Axa SA, Europe’s second-largest insurer
by market value. A few people have sued insurers over the use of
retained-asset accounts. Prudential won a lawsuit in 2009 in which a
survivor complained about the Alliance Account. MetLife has a case pending
in which a survivor says that she was cheated by the retained-asset
account. In court-filed papers, MetLife denies any wrongdoing.

There has been only one ruling by a federal appellate court on the
substance of such accounts -- and it went against an insurance company.
After a federal judge in Boston dismissed a policyholder suit claiming that
Chattanooga, Tennessee-based insurer Unum Group was stealing account
earnings from survivors, the U.S. Court of Appeals for the First Circuit
overruled the lower court in 2008. It reinstated the case.

‘Euphemistically Named’

“The euphemistically named ‘Security Account,’ accompanied with a
checkbook, was no more than an IOU which did not transfer the funds to
which the beneficiaries were entitled out of the plan assets,” the
three-judge panel wrote. Unum spokeswoman Mary Clarke Guenther says
retained-asset accounts are a commonly accepted practice in the industry.
The case is pending.

Absent regulatory or legal intervention, bereaved family members like Cindy
Lohman will continue to find death benefits going into retained-asset
accounts. Her son, Ryan, posthumously received a Purple Heart and Bronze
Star Medal for sacrificing his life to save fellow soldiers in Afghanistan
in August 2008. He had ordered a Humvee to swerve to avoid an explosive
device, exposing himself to its deadly blast.

‘Accept The Reality’

Three days after learning of her son’s death, Lohman says, an Army casualty
assistance officer came to her home, explaining that Ryan had a life
insurance policy and that her signature was needed to release the money.
“By signing that, it forced me to accept the reality that he was dead and
not coming back,” she says.

Since 1999, the VA has allowed Prudential to send survivors “checkbooks”
tied to its Alliance Account. In 2009 alone, the families of U.S. soldiers
and veterans were supposed to be paid death benefits totaling $1 billion
immediately, according to their insurance policies. They weren’t.
Prudential’s VA policies promise either a lump sum payout or 36 monthly
payments. About 90 percent of survivors, including Lohman, choose to
receive the full amount upfront. When they do, they don’t get a check; they
get a “checkbook.”  Under a 2008 law, survivors covered by Prudential’s VA
policy are allowed one year to put death benefits into a Roth IRA, allowing
them to earn investment gains for the rest of
their lives tax-free. Prudential never informed Lohman, she says.

‘If They Had Told Me’

“I definitely would have done that if they had told me,” Lohman says. Even
Stephen Wurtz, deputy assistant director for insurance at the VA, who has
overseen the insurance program for 25 years, has been kept in the dark by
Prudential. "Prudential runs the program on a post-reimbursement basis
only,” he initially said, referring to the $4.2 million in fees the VA paid
Prudential in 2009. “They’re really good
guys. They do it patriotically. They don’t make any money from the Alliance
Account.”

Wurtz, 62, said he had believed that the Alliance Account money went into a
bank. After he learned that the payouts actually stayed in Prudential’s
general fund, Wurtz says, he asked Prudential how much money the insurance
company made from these accounts and how many dollars it held in retained
assets. Prudential declined to answer, saying that information was
proprietary, Wurtz says.

‘Maybe I Didn’t’

Prudential, which has had the insurance contract with the VA since 1965,
pitched the checkbook payout to the VA in 1999 as an added benefit to
survivors, Wurtz says. The government agency accepted Prudential’s offer,
he says. “Maybe I didn’t ask enough questions,” he says. Printed on each
“check,” next to “Prudential’s Alliance account” is the name of JPMorgan,
the second-biggest U.S. bank by assets. JPMorgan spokesman Murray declined
to say how much the bank is paid for its role with Prudential.

The way Prudential has set up the “checks” implies that JPMorgan stands
behind the accounts and that they are thus backed by the FDIC, Duke’s
Baxter says. “That’s misleading the beneficiaries,” he says. “We disclose
the roles of all companies involved in administering these accounts,”
Prudential’s DeFillippo says. JPMorgan’s Murray declined to comment.
Prudential’s general account earned 4.4 percent in 2009, mostly from bond
investments, according to SEC filings. The company has paid survivors 0.5
percent in 2010.

‘It’s Shameful’

“It’s shameful that an insurance company is stealing money from the
families of our fallen servicemen,” says Paul Sullivan, who served in the
1991 Gulf War as an Army cavalry scout and is now executive director of
Veterans for Common Sense, a nonprofit advocacy group based in  washington.
“I’m outraged.”  Sullivan, a project manager at the VA’s benefits unit from
2000 to 2006, says he was never told Prudential kept money and earned
investment gains from soldiers’ insurance payouts instead of sending it to
survivors.

“There shouldn’t be secret profits,” he says. “This should be transparent.
The lack of oversight is appalling.” It’s not much different for the 4
million nonmilitary U.S. government employees and retirees -- including
staff of the FDIC -- covered by MetLife policies. That program, begun in
1965, averages more than $2 billion in death benefits claimed every year,
the government says.

Payouts are handled by the Office of Federal Employees’ Group Life
Insurance. That makes it look like the government is taking care of its
employees’ insurance coverage. It isn’t. That “office” is a unit of
MetLife.

MetLife Holds the Money

Edmund Byrnes, a spokesman for the Office of Personnel Management, which
oversees MetLife’s federal employee contract, says MetLife segregates death
benefits into beneficiary accounts after it approves death claims.  “Once
MetLife transfers the funds to the Total Control Account, the monies are no
longer under MetLife’s control,” Byrnes says.

MetLife spokesman Madden says something different. “The assets that back
the liabilities on all the TCAs are placed in MetLife’s general account,”
he says.  Back at the Veterans Affairs office, Deputy Assistant Director
Wurtz, who’s a civilian employee, says he now understands for the first
time that since he’s covered by the federal insurance program, his own wife
could receive a MetLife “checkbook” someday.

‘Ripping Off Their Own’

“Uncle Sam is ripping off their own,” Wurtz says. “My wife would get the
money, and they would blood-suck some of it out of her.” It took Wurtz,
who’s been working with insurers for most of his career, more than a decade
to understand how retained-asset accounts work. Companies like MetLife and
Prudential have never told millions of Americans with insurance policies
that when they die, the insurer plans to hold their family’s money in its
own account to make investment gains from the death benefit. “It’s
outrageous that somebody’s profiting off other people’s grief,” says Mark
Umbrell of 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 anything will change. State bank regulators say if there are to
be any reforms, they should be made by insurance departments. Officials at
those state agencies often say they don’t even understand what a
retained-asset account is.  “It’s flown under the radar,” professor Stempel
says. “Regulators have not done their job.”  Until public officials wake
up, the bereaved will remain a secret profit center for the life insurance
industry.
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