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Financial Risks Follow to the Grave

posted by Katie Porter

The New York Times broke the story yesterday about how the VA may be mishandling the death-benefit accounts for life insurance beneficiaries of military personnel. Apparently many of the VA life insurance companies, including Met Life and Prudential, do not give beneficiaries a check when the policy is payable as a lump sum. Instead, grieving family are mailed a checkbook and told that the payout was ready for use in an "convenient interest-bearing account." But here are the catches: 1) The money is not in an FDIC-0insured account, meaning these beneficiaries' money could disappear if the insurers went under. This fact would be hard for consumers to discern given that the checks themselves bear the names of large banks like JPMorgan Chase. The money actually resides in the insurers' general corporate account, earning investment income. 2) The VA was under the impression that the insurers were patriotic volunteers, earning no profit on the checkbook option. In fact, the insurers earned about a 5 percent return, while the beneficiaries received 1 percent interest. When the NY Times explained this, the VA spokesperson said "Maybe I didn't ask enough questions." My former colleague at UNLV's William S. Boyd School of Law, Jeff Stempel, put a finer point on it. "[T]his is a scheme to defraud by inducing the policyholder's beneficiary to let the life insurance company retain assets they are not entitled to. It's turning death claims into a profit center."

His comments echo a theme in his recent scholarship, which is that insurance policies are not merely contracts but are also social instruments, and should be regulated and interpreted with such a purpose in mind. The insurers' behavior described above seems to violate the social contract, even if it was within the letter of the written contract. Even more broadly, the story is a reminder that while consumers are often exhorted to buy insurance as a hedge on the kinds of adverse events that can lead to bankruptcy, such as death of a spouse and loss of her/his income, some financial risks appear to follow people to the grave.


Where are the damages? I see the outrage, but where's the evidence that: (a) any beneficiary failed to receive a full benefit to which he or she was entitled, or (b) lost any money on a non-insured account, or (c) received a rate of return on such an account less than that provided by banks and money-market funds on comparable funds?

Where are the damages? If the policies had the usual option of allowing payment over a period of time had a guaranteed rate of interest which was higher than that offered ubder the checkbook arrangement, then the beneficiaries were being tricked?

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