Life Insurance Companies Profiting from Death Benefits

August 30, 2010

Millions of Americans are falling for it, including the relatives of fallen service men and women. Military personnel are told their families will receive a $400,000 life insurance payout if they perish. But instead of a lump sum, grieving relatives are receiving what appears to be a checkbook, along with a letter telling them they can take their time withdrawing the money. It’s part of a widespread practice netting life insurance companies hundreds of millions in profit.

According to a recent Bloomberg report, life insurance companies are holding out on paying death benefits to family members so they can reinvest the money and make a profit on it. The insurance companies tell relatives that they’ll keep the money for safekeeping and apply a small amount of interest – usually .5 percent – on the sum. Relatives of the
deceased are issued a “checkbook” by the insurance companies, giving the impression that the money is being kept in a bank. It’s not. The money is being funneled into their own corporate investment accounts, which can return up to 5 percent interest. That means these insurance companies are making 5 to 10 times the amount eventually paid to families. What’s more alarming is that while the payout is in the hands of the insurance company, the money is not FDIC insured, meaning that if the insurance company happens to go bankrupt,
the money is lost permamently.

“It’s a rip off,” says Georgia Watch deputy director Danny Orrock. “The insurer gets to gamble on Wall Street with the beneficiary’s money. Unlike if the money were being held in a bank, the money in the account belongs to the insurer, not the account holder. So the company gets to play the market while the grieving family bears all the risk.”

There are reportedly more than a million of these accounts holding more than $28 billion in death benefits. Metlife alone holds $10 billion. While Prudential and Metlife were the focus of the Bloomberg report, more than 100 insurance companies have similar “checkbook” programs.

Georgia Watch urges public officials to wake up and fix this sleazy business practice.