New York Attorney General Andrew Cuomo recently announced that his office had initiated an investigation into the life insurance industry regarding profits on death benefits retained from the families of deceased policyholders. Two insurance companies in particular — MetLife and Prudential — marketed and sold life insurance policies which permit a beneficiary named under the policy to place death benefits in interest-bearing accounts instead of being paid the entire death benefit in one lump sum. Prudential and other life insurance companies market the accounts, called "retained asset accounts," as a purported service to beneficiaries as the accounts allegedly give beneficiaries time to think about how they will spend and/or invest the life insurance payout. MetLife and Newark, New Jersey based Prudential, according to the allegations in the class action complaints, placed death benefits in interest-bearing accounts and issued IOUs to survivors. The life insurance companies, of which there are many, engaged in this practice supposedly as a service to allow bereaved beneficiaries time to think about what they’ll do with the payout owed under each policy. The carriers made money by investing the funds in bonds and keeping the difference between returns and the interest they credit to the accounts. Meanwhile, the life insurance companies invested the funds for their own benefit and retained the difference between returns and the interest they credited to the accounts.
Mr. Cuomo’s investigation was prompted by a Bloomberg Markets magazine report and a formal review of life insurance company practices by the New York State Insurance Department. According to the Bloomberg Markets magazine report, more than 100 carriers earned investment income on $28 billion owed to life insurance beneficiaries while the beneficiaries themselves lost a significant amount of money as a result of these allegedly deceptive accounts. New York-based MetLife, the biggest U.S. life insurer, and No. 2 Prudential are among the firms that administer the so-called retained-asset accounts and both have had class action lawsuits filed against them seeking compensation for allegedly violating policyholders’ agreements by illegally changing the terms of their life insurance policies in order to avoid paying millions of dollars due to its policyholders who have suffered the loss of a loved one.
The class action lawsuits allege that both MetLife and Prudential, among other purported unlawful practices, instead changed their claims-handling practices to drastically reduce payments to policyholders. The lawsuits assert that these two insurance companies may be violating federal bank law and state common law by engaging in such practices, Bloomberg Markets reported. Importantly, unlike bank accounts, the life insurance accounts aren’t guaranteed by the Federal Deposit Insurance Corp. ("FDIC"), resulting in policyholders having no recourse but to file lawsuits in attempt to recoup their promised death benefit under the policies.
For example, Prudential paid survivors like Cindy Lohman, the mother of a slain Army sergeant, 1% interest in 2008 on their Alliance Accounts, while it earned a 4.8%return on its corporate funds, according to regulatory filings. Ms. Lohman told Bloomberg that her IOUs were rejected twice by salespeople when she tried to use them to make retail purchases. In fact, life insurance beneficiaries should have full access to the money in their retained asset accounts and, should be able to withdraw the full amount right away or at a later date. Indeed, the American Council of Life Insurers, the industry lobby headed by MetLife Chief Executive Officer Robert Henrikson, said in a statement that, "Retained asset accounts provide a significant benefit to family members who are dealing with the emotional loss of a loved one." He allegedly failed to explain that in practice, beneficiaries end up losing money on the death benefit promised to them under the policies.
Thomas Considine, commissioner of the New Jersey Department of Banking & Insurance, said he instructed staff to question Prudential about Ms. Lohman’s rejected IOUs. And New York regulators issued a letter to insurers urging greater disclosure of the accounts’ terms and the absence of an FDIC backstop, Mr. Gaul said. The watchdog will then consider whether any rules would prohibit insurers from providing the accounts, Mr. Gaul said. In addition, Pennsylvania Insurance Commissioner Joel Ario is considering a plan to require insurers to obtain the consent of beneficiaries before creating an account on their behalf. He said in an interview that his staff is studying the issue.
If you are a beneficiary of a life insurance policy purchased from a life insurance company, and death benefits belonging to you were placed in interest-bearing accounts or so-called "retained assets accounts", please contact us as soon as possible to discuss your legal options.