My Take on a Life Insurance “Scandal”

Recently I listened to a piece on NPR which was based on an investigation by Bloomberg Markets magazine. There was a piece on July 28 on “All Things Considered” and a separate, related piece on July 29 on “Morning Edition.”

Bloomberg’s Piece

NPR’s “Life Insurance Firms Profit From Death Benefits”

NPR’s “Expert Blasts Insurance Practice as Deceptive”

Here is the preview:

Millions of Americans are being duped by life insurance companies that have figured out a way to hold onto death benefits owed to families. 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, an investigation by Bloomberg Markets magazine found. Among those being tricked are parents and spouses of US soldiers killed in battle in Iraq and Afghanistan.

Here is my take:

People who know me understand me to be a bit of a cynic regarding the life insurance industry on occasion. I have been consistent in my criticism of the market regarding sales practices, lack of transparency and perpetuating consumer misunderstanding of products. In short, the sometimes negative reputation of the industry is not entirely undeserved which makes it easy to beat up the industry even when it doesn’t deserve it.

My comments here are going to be relative to the concept at hand, not to the implementation of the practice. For all I know, consumers are being misled relative to understanding their options and, if so, I hope the companies are taken to task for it. But simply not understanding something is entirely different than it being a “rip off”.

The issue at hand is “retained asset accounts”. Beginning in the eighties, some insurance carriers created a new death benefit option which allowed the death benefit to stay in an account at the insurance carrier, earning interest, for the beneficiaries to draw on as desired rather than to receive the entire death benefit in a lump sum. It is simply one of the settlement options of which the consumer can take advantage of if he cared to. Many people have found this to be beneficial and some insured individuals chose this option for their beneficiaries specifically so they wouldn’t receive a lump sum of money at a particularly inopportune time. This option allows the money to be warehoused, at interest, until the parties at hand collect themselves and can make rational decisions, possibly with counsel.

But, per the investigation, here are some comments and charges; it is a “rip off”, a “disservice to policy holders”, “extracting an extra buck out of policy holders”, “they should be acting more honorably”, “duped by life insurance companies”, “making hundreds of millions in secret profits”, the carrier “keeps their money”, “make a profit on the death of a soldier”, “makes money on money that belongs to survivors”, “profiting on others people’s grief”, “we’re being taken”, “the bereaved will remain a secret profit center for the life insurance industry”.

The bottom line is that while clearly the carriers may, and in my opinion, should, make money on assets in these accounts, the money is the beneficiary’s and they can have every penny of it at moment’s notice. It is simply a service and many people like it and appreciate it as an option. I’m afraid the insurance companies are in a lose/lose position. If they were to automatically send lump sum payments to unprepared, possibly uneducated, grieving beneficiaries, making them targets for unscrupulous predators, they would undoubtedly be demonized.

Clearly the interest rate is modest as it would be in any on-demand account and there is no doubt that “better” investment options may exist. Certainly beneficiaries should examine alternative options and possibly retain the services of professional advisor. Of course the carriers should never mislead anyone into thinking that this is their only option. These accounts should never be postured as bank accounts protected by the FDIC (although I believe more people have lost their money in banks that went under than in life insurance companies which have failed). While not the same, in a way I don’t see a whole lot of difference between this and a beneficiary taking the money in a lump sum and then using it to by an annuity, which is also backed by the claims paying power of the carrier. What is certain is that the money goes somewhere. Whether it is a CD at the local bank or a high risk stock transaction, someone is getting the money and someone is making money off of that money. Why not take that institution to task for “making a profit on the death of a soldier” or “making secret profits” or “making money on money that belongs to survivors”? It’s a silly question or course.

For Representative Debbie Halverson to introduce legislation requiring insurance companies to tell beneficiaries how much the company stands to make on the spread is laughable. Whether this is emotion run amuck or blatant politics or even shocking simplemindedness, I can’t be sure. To suggest holding a single industry to a different standard than the balance of the financial services (how much does your bank make on the balance in your checking account or money market?) or any industry in the market (how much does Apple make on the iPhone you just bought or Toyota on your new Lexus or the grocery store on the brats you grilled last weekend?) makes me shake my head in disbelief.

To posture this, as the writer does, as the money being in “potentially risky assets”, and layering in the emotional aspect of this as a practice to dupe the families of fallen soldiers, is what the often modern sensational media is all too well known for. This is not a practice targeted to the soldiers’ survivors but an option for most policy owners. Talking about misusing a tragedy for personal gain, using military deaths as a psychological tool to create a sensational story may be the epitome of a “scandal”.

To put this into perspective, this is an option, not a requirement. Per the article, the practice has become “standard operating procedure” although I have never even once seen the practice in action or had a beneficiary choose this option. Once again, if misleading information is being provided to beneficiaries in order to trick them into keeping the money in the carriers’ accounts, I hope the investigation verifies this and puts a quick end to it. I believe the option of a lump sum should be at least as apparent as any other option and absolutely no roadblock of any sort, real or imagined, should be put in the way of getting it. I will contend, though, that a legitimate and sometimes well received death benefit option which is misunderstood by some, is not the problem. Either sensationalistic reporters or unscrupulous insurance company employees are the problem. I hope we find out.

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