Insurance Companies Payout Schemes
United States Senator Charles E. Schumer is drafting legislation that would require the Department of Veterans Affairs (VA) and the Office of Personnel Management (OPM) to guarantee that any life insurance company they contract with offer lump sum payouts of death benefits as the default payment method for the families of lost soldiers and other federal workers.
Reports this week revealed that insurance companies used by VA and OPM are using so-called ‘retained asset accounts’ and collecting up to 4% interest on money owed to beneficiaries, rather than paying them out to those they are owed to.
Policyholders and beneficiaries of these accounts are led to believe their payouts are deposited into an account with all the protections of an ordinary bank account, or in some cases a money-market fund, when in fact the money owed to them is held in the insurance company’s general corporate account, accumulating interest for the insurance company. A Bloomberg News story reported that insurers are holding onto at least $128 billion in assets. Rather than receiving a check with the full amount of the claim, beneficiaries are sent a “checkbook” and told that their benefits will be held in an account at the insurance company which they can access any time by writing a “check”.
“The last thing that family members and loved ones of our soldiers should be worried about is whether the funds they expect to collect from a life insurance policy will be there when they need them,” said Schumer. “It’s deeply troubling that insurance companies would promote these accounts as if they were run of the mill checking accounts, yet the insurance companies profit from the interest and provide no FDIC guarantee that the money itself is insured.”
Several insurance companies offering ‘retained asset accounts’ contract for life insurance policies with the VA, on behalf of veterans, and with OPM, on behalf of non-military federal employees. Reports have shown that ‘checks’ written out by beneficiaries are nothing more than IOUs written by the insurance company and when presented to merchants they are sometimes rejected as insufficient payment. Moreover, the accounts are not FDIC insured – a fact that is not prominently disclosed, if it is disclosed at all – and are subject to the claims of the insurance company’s creditors. Not only is this misleading, but it is potentially criminal – it is unlawful to accept deposits without being chartered to do so by state or federal banking authorities.
Schumer is offering legislation that would require that any insurance company contracting with VA or OPM be required to offer a lump sum payout as the default payment mechanism for beneficiaries, unless a beneficiary proactively decided to maintain the funds in an account held by the insurance company. The legislation would make retained asset accounts an opt-in and require sign-off by the beneficiary after full and fair disclosure of all the risks of retained asset accounts.
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