What this means is that Prudential is investing -
and profiting from - death benefits owed
to service members' families,
using money provided by the government.
By David Evans
Bloomberg
Sunday, October 3, 2010
When Prudential Financial invests the death benefits owed to survivors of U.S. troops killed in battle, the money comes from a source with deep pockets: the federal government.
After a service member dies in combat - including the more than 4,000 who have been killed in Iraq and Afghanistan - the Department of Veterans Affairs sends Prudential the full amount of each family's life insurance coverage, usually $400,000.
After a service member dies in combat - including the more than 4,000 who have been killed in Iraq and Afghanistan - the Department of Veterans Affairs sends Prudential the full amount of each family's life insurance coverage, usually $400,000.
The government has paid Prudential $1.7 billion for these benefits since 2003, when the war in Iraq began, according to information provided by the VA.
Prudential holds that taxpayer money, invests it and reaps the gains.
Here's how it works: If survivors request a lump-sum payment of the death benefit, Prudential opens a retained-asset account, a quasi-checking account that allows families to draw money when they are ready to spend it.
Until the money is used, it stays in Prudential's corporate account. There, the insurer invests it, mostly in bonds, making returns as much as eight times what it is paying out to holders of the retained-asset account.
What this means is that Prudential is investing - and profiting from - death benefits owed to service members' families, using money provided by the government.
"They have what appears to be a nice sweetheart deal with the federal government," says Michael Powers, a professor of risk management and insurance at Temple University in Philadelphia. "This strikes me as the same sort of thing as those classic stories of the government paying hundreds of dollars for a wrench or a toilet seat."
Ninety-five percent of survivors paid by Prudential ask for lump-sum payments, the VA says. Since 1999, the company has sent out more than 60,000 Alliance Account checkbooks, instead of checks, covering more than $7 billion in death benefits when families asked for full payouts.
On average, Prudential holds about 16 percent of survivors' money for at least a year, according to the company. As of June 30, Prudential had $662 million belonging to military families in its general account, the VA says.
Prudential's general account earned 4.2 percent interest in the first half of 2010, regulatory filings show. The company paid survivors holding Alliance Accounts 0.5 percent in the same period.
"It sure looks like the VA provided an ill-conceived giveaway, or that Prudential played the VA like a fool," said Steven Schooner, co-director of the Government Procurement Law Program at George Washington University. "It's a lose-lose proposition for everyone but Prudential."
Michael - Be carefull on these kind of reports. First of all you might want to consider that money market accounts with your local bank pay about 25bps while savings accounts and checking accounts pay even less. Insurance companies asset/liability match so you cannot look at the gross earnings rate of their genral account. You should look to their short term asset/liability side. The short term earnings are high right now due to the short term bond market in general. In a normal market the difference between earned and paid should be about 5 times...about like a bank. The bottom line...the owners can take their money at anytime so if it is a bad deal...why don't they? Good Luck!
ReplyDeleteFirst, thank you for taking the time to comment as it is genuinely appreciated. Secondly, I will acknowledge my overall distrust of the insurance industry given the fact I spent 19 years of my life working within said industry and regardless of "partnership themed" brochures, insurance companies were never true partners.
ReplyDeleteAs noted by a Bloomberg investigation:
"So from 1999 until 2009 - a 10-year period - Prudential was sending out checkbooks, holding onto billions of dollars in survivors' money, even though the contract required them to send out checks," said David Evans of Bloomberg Markets Magazine. His six-month investigation in late August broke the story.
My perspective is the phrase, "even though the contract required them to send out checks." Filing a death benefit claim is clearly an extremely emotional time and I maintain Prudential took advantage of this for their gain, not that of the surviving family member. The insurance company is purely and simply an entity to pay claim proceeds given their contract terms with the U.S. Government.
I recently experienced the "checkbook" as the executor of a sibling passing away. As I made arrangements for funeral services and payment, there was no discussion referencing a checkbook until it showed up in the mail albeit I was expecting a lump sum settlement from which to pay bills. Given my near two decades dealing with insurance companies, I simply cut a check and closed the account. Not likely too many military spouses have much experience with the insurance industry other than a cracked windshield.
Your points are well made with respect to potential returns however my solo exception is Prudential is not the surviving spouse's asset advisor and it is not their right to pretend they have a survivor's best interest at heart...pay the claim in a timely manner and move on.
I sincerely encourage you to comment often and keep this grandpa in check.