Prudential may find itself sitting across from 60,000 military families when it answers charges of improperly collecting interest on life insurance benefits. Attorneys are considering adding fraud charges to the suit, as well.
Six plaintiffs from around the country have filed suit against Prudential in Massachusetts, claiming that the insurance giant misrepresented payout options and wrongfully profited from life insurance policies managed on behalf of the U.S. Department of Veterans Affairs (VA). A spokesperson defended the company, stating they handled the funds responsibly and were always focused on the grief and needs of the beneficiaries.
At the center of the argument is the company's use of the increasingly controversial "retained-asset account." Instead of paying out the benefits in one lump sum, the insurance company holds the funds in an interest-bearing "Alliance Account." Beneficiaries receive "check" books and can withdraw money at their discretion.
The problem is the interest. While Prudential (and other life insurers who promote the accounts) pays 0.5 to 1.5 percent on the balance to beneficiaries, the company may be realizing 5 to 6 percent. The benefit payout, says the company, is not held in a "virtual envelope" for each beneficiary. Rather, it is held in the general fund and invested. And while a bank may invest depositors' funds, an insurance company is not a bank.
According to the families' attorney, the lost interest could add up as much as $30,000 for beneficiaries who leave the money untouched for a few years. The insurer counters that the company only makes short-term investments with the payouts, and that those funds are kept liquid so families can have access to them as needed. Still, the plaintiffs claim they were not informed or were ill-informed of how their loved ones' life insurance benefits would be managed.
The U.S. District Court in New Jersey dismissed a similar claim last year. The difference between that plaintiff and these families is the military status. Only time will tell if a court has a different opinion when families of military personnel killed in Iraq and Afghanistan have a claim dispute with a $667 billion insurance company.
Resource: Orlando Sentinel "Dead Soldiers' Parents Sue Insurer Prudential Over Interest Paid on Life Insurance Policies" 8/30/10