G4
Business insurers from G1
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 Ameri- cans have unwittingly been placed in the same position by their insurance companies. The practice of issuing what they call “checkbooks” to survivors, in- stead 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 indus- try holds $4.6 trillion in assets, according to the American Coun- cil of Life Insurers. Insurance companies tell survi- vors that their money is put in a secure account. Neither Pruden- tial nor MetLife, the nation’s larg- est life insurer, segregates death benefits into a separate fund. Prudential, the second-largest life insurer, holds payouts in its own general account, according to regulatory filings. MetLife has told survivors in a standard letter: “To help you through what can be a very diffi- cult, emotional and confusing time, we created a settlement op- tion, the Total Control Account Money Market Option. It is guar- anteed by MetLife.”
No FDIC insurance
The company’s letter omits that the money is in MetLife’s corpo- rate 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 non-military feder- al employees, and Prudential paid 0.5 percent interest in July to sur- vivors of government workers and soldiers. That’s less than half 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 custom- ers with MetLife “checking ac- counts.” The insurance company, not the bank, most recently re- ported 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 University of Ne- vada-Las Vegas who wrote “Stem- pel on Insurance Contracts.”
‘Bad faith’ “It’s institutionalized bad
faith,” he said. “In my view, this is a scheme to defraud by inducing the policyholder’s beneficiary to let the life insurance company re- tain 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, company spokesman Bob DeFil- lippo said. “For some families, the account is the difference between earning interest on a large amount of money and letting it sit idle,” he said. Prudential follows the law, he said. “We fully and regularly disclose
the nature and terms of the ac- count to account holders,” he said. “We make it clear that the money can be withdrawn at any time by simply writing a draft.” MetLife spokesman Joseph
Madden said his company’s cus- tomers are happy with the Total Control Account. “The feedback from TCA cus- tomers has been overwhelmingly positive,” he said. “The TCA af- fords beneficiaries security, peace of mind and time to make an in- formed decision — while earning interest in the interim.” Madden said the company was
paying some survivors 0.5 per- cent in July while some others got 1.5 or 3 percent, depending on the age and origin of insurance ac- counts. The accounts don’t violate any laws and they are authorized by New York state insurance law, Madden said. Insurers are holding on to at least $28 billion owed to survi- vors, according to three firms that handle retained-asset accounts for about 130 life insurance com- panies. There are no public rec- ords showing how much compa- nies are holding in those ac- counts. The “checks” that Lohman wrote, the ones rejected by retail- ers, were actually drafts, or IOUs, issued by Prudential. Even though the “checks” had the name of JPMorgan Chase on them, Lohman’s funds weren’t in that bank; they were held by Pru- dential. Before a check could clear, Pru- dential would have to send mon- ey to J.P. Morgan, bank spokes- man John Murray said.
R
KLMNO
SUNDAY, AUGUST 1, 2010 Companies hold, earn interest on federal death benefits
LEAH L. JONES FOR THE WASHINGTON POST The funeral procession of Sgt. Ryan P. Baumann travels through Leonardtown in August 2008. Baumann, 24, was killed by a roadside bomb in Afghanistan.
Federal bank law Insurance companies — in ad- dition to holding on to survivors’ money, paying them uncompeti- tive interest rates and giving them misleading guarantees — may be violating a federal bank law. A 1933 statute makes it a felo- ny for any company to accept de- posits without state or federal au- thorization. That means only banks or cred- it unions can accept deposits, said Arthur Wilmarth, a professor at George Washington University Law School who has testified be- fore Congress about banking reg- ulations.
If a prosecutor pressed an in-
surance company, retained-asset accounts could be outlawed, Wil- marth said, because insurers say they deposit money into these ac- counts and don’t have bank char- ters or banking regulation. Met- Life 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 said. “You then potentially could have a criminal violation.” This unregulated quasi-bank- ing system operated by insurers has none of the protections of the actual banking system. Lawrence Baxter, a professor at Duke Uni- versity School of Law in Durham, N.C., said 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, said Baxter, who has con- sulted with federal agencies on fi- nancial regulation. The government established the FDIC in 1933 after frantic de- positors tried to pull their money from banks. The federal govern- ment has no such program for death-benefit accounts. “There’s more than $25 billion out there in these accounts,” Bax- ter said. “A run could be triggered immediately by one insurance company not being able to honor its payout. The whole point of cre- ating the FDIC was to put an end to bank runs.”
No federal regulation The financial regulatory legis-
lation signed by President Obama Deceptive language
In assurances to policyholders and letters to beneficiaries, insurance companies MetLife and Prudential mislead people about “checkbook” accounts.
‘We will automatically open a money market account in your name’ Fact: Tere’s no money-market account set up for survivors. MetLife holds the death-benefits payouts for federal employees in its own general account.
MetLife ‘guarantees the full amount’ Fact: Te money isn’t covered by FDIC insurance. In its death-benefit claim form for federal employees, MetLife omits that funds aren’t in a bank and aren’t insured.
‘Only you have access to the Alliance Account’ Fact: All of the death-benefit money is in Prudential’s general account, and only Prudential has access to that.
‘It earns a competitive interest rate’ Fact: MetLife and Prudential pay 0.5 percent to beneficiaries of federal employees and soldiers. Banks offer money-market accounts paying more than twice that, with FDIC insurance.
SOURCES: MetLife, Prudential, U.S. Government BLOOMBERG NEWS
tained-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 said. He’s wrong. No retained-asset accounts have FDIC coverage. In Connecticut, where 106 in-
surance companies are based, the state insurance department man- ager for market conduct, Kurt Swan, also said retained-asset ac- counts are kept in banks, with FDIC coverage. “I think they’re just trying to of- fer some flexibility to the benefici- ary,” he said. Swan and his col- league William Arfanis, the de- partment’s principal financial examiner, both said the insurers don’t profit from the retained- asset accounts. That, too, is wrong. The companies earn in- vestment gains on death benefits.
‘Not drawn attention’ Just six states had any rules for
SUSAN BIDDLE/THE WASHINGTON POST
Baumann’s family attends his funeral at Arlington National Cemetery. Baumann’s mother, Cindy Lohman, shown accepting the flag, says she was misled about her son’s life insurance benefits.
on July 21 doesn’t address re- tained-asset accounts. It creates a new federal insurance office that won’t be a regulator. It will collect information, monitor the indus- try for systemic risk and consult with state insurance regulators. An industry with $19.1 trillion in potential liabilities will remain unregulated by the federal gov- ernment. In 2008, insurers ap- proved claims totaling $60 billion in death benefits, according to the life insurance council. The federal government
doesn’t even regulate the life in- surance it supplies, via MetLife, to its own employees in a pro- gram called Federal Employees’ Group Life Insurance. As the VA does for soldiers, the U.S. Office of Personnel Management sends a handbook to non-military gov- ernment workers — 4 million ac- tive employees and retirees. The handbook says their life in-
surance policies automatically pay out death benefits in the form of a “money market account checkbook.” The 217-page hand-
book omits that the money isn’t FDIC insured and that it will stay with MetLife until someone writes a “check.” This lack of disclosure is un- conscionable, said Harvey Goldschmid, an SEC commission- er from 2002 to 2005. “I can’t imagine why bank reg-
ulators haven’t been requiring a prominent ‘no FDIC insurance’ disclosure,” said Goldschmid, a law professor at Columbia Uni- versity. “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 Securities and Exchange Commission requires fund com- panies to warn investors that money-market funds don’t have FDIC insurance. It also mandates that fund managers provide a
prospectus, invest in specific types of safe debt and post a de- tailed schedule of their invest- ments monthly online. Insurers’ retained-asset ac- counts have none of those reg- ulatory protections. A standard MetLife condolence
letter to survivors, dated June 2009, leaves out that accounts aren’t in a bank and aren’t feder- ally insured. In June 2010, 25 years after MetLife invented re- tained-asset accounts, the com- pany released a customer agree- ment that does disclose that re- tained assets aren’t in a money market account or 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 lan- guage contradicts the federal em- ployee handbook, which says sur- vivors get a money market ac- count. Gerry Goldsholle, the man who
invented retained-asset accounts, said MetLife makes $100 million to $300 million a year from in- vestment returns on the death benefits it holds. A former presi- dent of MetLife Marketing, Gold- sholle, 69, devised the accounts in 1984. He’s now a lawyer in private practice in Sausalito, Calif.
‘This is crazy’
Goldsholle said 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,” said Goldsholle, who left the firm in 1991. “What are we do- ing 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 on to death ben- efits. “The company would win be- cause we would make a nice spread on the money,” Goldsholle said, while customers would earn interest on their accounts. Met- Life, he said, can earn one to three percentage points more from its investment income — mostly from bonds — than it pays out to survivors. The accounts Goldsholle in- vented have spread faster than state regulators can track them — and some regulators don’t even understand how they work. Ted Hamby, North Carolina’s deputy insurance commissioner for life and health, said he believes re-
retained-asset accounts as of July 2009, according to the National Association of Insurance Com- missioners. Arkansas, Colorado, Kansas, Nevada, North Carolina and North Dakota require in- surers to disclose fees and inter- est 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. If state insurance regulators
have paid scant attention to re- tained-asset accounts, state bank regulators have taken an even more hands-off approach. “Quite honestly, we deal with issues that our members want us to deal with,” said Michael Ste- vens, senior vice president for regulatory policy at the Washing- ton-based Conference of State Bank Supervisors. “This is not one that has drawn their atten- tion.” Three companies have not only noticed but have also profited by handling retained-asset accounts for insurers. Open Solutions, based in Glastonbury, Conn., oversees 400,000 accounts for 67 insurance companies.
Open Solutions sends out
“checkbooks,” prints periodic statements and computes ac- crued interest for accounts with total deposits of $10 billion, said Jay Woldar, director of sales 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 re- tained assets. Chicago-based Northern Trust handles about $4 billion in 125,000 accounts, spokesman John O’Connell said. Survivors generally don’t touch these accounts immediately. “About 40 percent of the money
stays in for more than a year,” Woldar said. Insurers can have use of survi- vors’ money for years, even dec- ades, said Randi Lichtenstein, a product line manager at Bank of New York. “They can stick around for quite a while,” she said. “There are accounts that all insurance companies have on these plat- forms that go back 10, 15, 20 years.” MetLife’s Madden said most of
its customers’ retained-asset ac- counts 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 said. During a routine audit com-
pleted in 2004, the New York State Insurance Department found that 1,476 retained-asset accounts, worth a total of $33.5 million, at Hartford, Conn.-based Phoenix Life Insurance had been
insurers continued on G5
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