The following is the result of a July 28, 2010 Bloomberg magazine article and an August 1, 2010 Washington Post Business section article. The articles shed light on the fact that the insurance companies, contracted by the VA, initially retain the death benefit proceeds for the survivor in an interest bearing saving account. This is done rather than making an immediate lump sum payment of the full amount upon the servicemember’s death. Beneficiaries have immediate access to the full amount, in total or in bits and pieces, at their discretion, through the use of ‘bank drafts.’ These ‘bank drafts’ are not for retail use like a bank’s checkbook but instead are used by the beneficiary to make withdrawals directly from the insurance account.
We need to distinguish between the federal insurance programs. Servicemembers’ Group Life Insurance (SGLI) is the military members’ version of employer provided group life insurance. It provides a death benefit to a max of $400,000 per member for a premium of $27 a month. Veterans’ Group Life Insurance (VGLI) is the group life program for members post-service. With a similar maximum death benefit as SGLI, its monthly premium is based on age and increases every 5 years.
The articles are written in the tone of a scandalous affair and that is why I’m writing this post. As a money guy here at MOAA, my intent is to provide additional financial insights so we can evaluate the articles and the situation with a more complete, balanced point of view.
DISCLOSURE: Let me be perfectly clear about this…I’m not taking a side in this post. I’m writing this because, as I read the articles with my financial hat on, I felt the articles were leaving out important points. I don’t know if there is a scandal or not because all the facts are not known. We’ll see how the story unfolds with time. If facts develop where servicemembers are being cheated, I figure MOAA will look into the situation as we do in any situation where servicemembers need assistance. So let’s look at the points to calibrate our meters.
The primary points of the article are;
- whether or not the insurance firms profited off the backs of servicemembers,
- the retained funds don’t pay a competitive rate,
- the deposits aren’t FDIC insured,
- no visibility in the program.
The situation has now energized state and national-level government officials also a few elected representatives to look into the issue and possibly float new legislation to “correct it.”
Point 1–Profiting off the deaths of Service members. The insurance firms hold the death benefits in an interest bearing account until the survivor is ready to deal with the aftermath. Survivors have immediate access to all funds through the use of a checkbook-like device. The accusation is that the firms earn money off the retained funds until the benefits are paid. All financial firms profit off of deposits held for customers. The money in a CD earns the bank more investment return than they pay us in interest. Had the survivor check been delivered in-full immediately to the survivor, unless the beneficiary put the money under the mattress, the proceeds would have been placed in some other firm’s deposit account earning interest until ready for use. Then that firm would profit from the money.
Point 2–The interest rate is not competitive. After a search of money market interest rates paid by banks for large amounts on Bankrate.com, the amounts of interest paid range from .3 to 1.3%. The insurance rate in these articles is .5%. Not the worst but not the best. But is it scandalous given the current interest rate environment? Those firms paying the highest rates aren’t as conservative as the highly regulated insurance industry. I’d be careful with firms paying rates much higher than the average rates. Higher rates come as firms assume greater risks with the deposits or the firm is willing to take a greater loss.
Point 3–No FDIC. FDIC insurance is $250k. Insurance firms cannot offer FDIC coverage. Full FDIC coverage for a $400k survivor benefit requires breaking up the amount in separate banks/accounts or using a bank that participates in the Certificate of Deposit Account Registry Service (CDARS). CDARS participation automatically breaks up the money to achieve full FDIC coverage but usually results in lower interest rates. However, the insurance industry is highly regulated for financial stability. Every insurance product we own (auto, house, life, long term care, annuities) is backed by the financial stability and reputation of the insurance firms we do business with everyday. In the case of the articles, the firms are Prudential and Met Life.
Point 4–No visibility in the program. The lack of FDIC on the accounts is not made clear in the account information. No insurance product explains that it doesn’t have FDIC coverage because insurance companies don’t have FDIC. However, the whole process of the retained account and the checkbook-device is made clear in the program paperwork. It is also made clear in the VA’s SGLI/VGLI Handbook and on the VA’s web site.
There are interesting points made about the legalities of insurance firms offering interest bearing deposit accounts in the first place and the fact that the firms are holding the money without the survivors’ intent for them to hold the money. That’s for the lawyers to fight about.
This isn’t only a military issue. This situation goes beyond military members as this retained death benefit account works the same for all kinds of insurance proceeds. Even federal civilian employees receive similar treatment. The article makes it seem the insurance companies are taking advantage of military members specifically.
There. I’m not sticking up for the government or the insurance companies. This is just the way things are on the money front.
The solution is in the hands of the beneficiaries. If a beneficiary has a problem with any of the above charges, he or she can withdraw all the assets immediately with the checkbook and put the money wherever he/she wants. I would suggest survivors exercise this power if you are uncomfortable with the program.
We’ll see if something more comes from the investigations.
