Senator Schumer to Introduce Bill on Life Insurer Payouts

Published: Tue 03 Aug 2010

Thomas Kristoffersen

Democratic Sen. Chuck Schumer of New York intends to introduce a bill that would change how some insurance companies pay the beneficiaries of life insurance policies for military personnel and federal workers.

If enacted, the legislation would force life insurers to pay the death benefit in one lump sum unless the beneficiaries do not wish the insurer to do so. Presently, Prudential and MetLife create money-market-like accounts for the monies and supply checks that can be used to draw down the death benefit or withdraw the full amount of the policy's payout.

The accounts are part of a longstanding practice within the life insurance industry that drew the attention of New York Attorney General Andrew Cuomo a week ago after a magazine article reported on the matter. Cuomo claimed life insurers earned "secret" profits from the payout practice by making a higher rate of return on the retained benefits than they pay to policy beneficiaries.

Scrutiny from Cuomo and Connecticut Attorney General Richard Blumenthal, in addition to federal legislators, has been combated in the last few days by industry regulators who claim the accounts can actually help beneficiaries too grief-stricken to make financial decisions immediately.

Connecticut's insurance commissioner, Thomas Sullivan, claimed his office receives 25,000 phone calls and about 6,000 formal complaints every year from consumers. Not a single call or complaint has been related to the retained-asset accounts, he reported.

In a statement issued Monday, Schumer claimed that the funds are not guaranteed by the federal insurance that safeguards bank deposits of up to $25,000. Sullivan said guaranty funds at the state level usually offer $350,000 of protection, with all states offering at least $250,000 of protection. Certain state funds, such as the Connecticut Life and Guaranty Association, protect accounts of up to $500,000.

Last week, the National Association of Insurance Commissioners said it is looking into what life insurers are required to report about the accounts in their communication with consumers. Sullivan said every state is supplying data on customer complaints to a national survey by the organization as well.

"If there is a legitimate consumer concern or a weakness in our regulatory regime, rest assured that it will be looked at," said Sullivan. "That said, I don't regulate by virtue of a tempest in a teapot."

Schumer's bill would require beneficiaries receiving a death benefit from a deceased federal employee or soldier to opt in to a retained-asset account rather than having it as the default option. The legislation would also require "full and fair disclosure of all the risks of retained asset accounts."

Another bill proposed by Debbie Halvorson in the House of Representatives last week would require life insurance companies paying benefits to the families of military members to offer financial counseling. Prudential Financial, in a letter it claims is representative of the type it mails to beneficiaries of life insurance policies covering military personnel, claims the Department of Veterans Affairs currently supplies personal financial counseling at no cost from a third-party service.