When Prudential Financial Inc. invests the death benefits owed to survivors of soldiers killed in battle, the money comes from a source with deep pockets: the federal government.
After a U.S. soldier dies in combat – including the more than 4,000 service members who have been killed in Iraq and Afghanistan – the Department of Veterans Affairs sends Prudential the full amount of each family’s life insurance coverage, usually $400,000.
The government has paid Prudential $1.7 billion for these benefits since 2003, when the war in Iraq began, according to information provided by the VA. Prudential holds that taxpayer money, invests it and reaps the gains.
Here’s how it works: If survivors request a lump-sum payment of the death benefit, Prudential opens a so-called retained-asset account, a quasi-checking account that allows families to draw money when they’re ready to spend it.
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Until the money is used, it stays in Prudential’s corporate account. There, the insurer invests the funds, mostly in bonds, making returns as much as eight times higher than what it is paying out to holders of the retained-asset account.
What this means is that Prudential is investing – and profiting from – death benefits owed to the families of slain soldiers, using money provided by the U.S. government.
“They have what appears to be a nice sweetheart deal with the federal government,” says Michael Powers, professor of risk management and insurance at Temple University in Philadelphia. “This strikes me as the same sort of thing as those classic stories of the government paying hundreds of dollars for a wrench or a toilet seat.”
Ninety-five percent of survivors paid by Prudential ask for lump-sum payments, the VA says. Since 1999, Prudential has sent out more than 60,000 Alliance Account checkbooks, instead of checks, covering more than $7 billion in death benefits when families asked for full payouts.
On average, Prudential holds about 16 percent of survivors’ money for at least a year, according to Prudential. As of June 30, the company had $662 million belonging to military families in its general account, the VA says.
Prudential’s general account earned 4.2 percent in the first half of 2010, regulatory filings show. The company paid survivors holding Alliance Accounts 0.5 percent in the same period.
“It sure looks like the VA provided an ill-conceived giveaway, or that Prudential played the VA like a fool,” says Steven Schooner, co-director of the Government Procurement Law Program at George Washington University Law School in Washington. “It’s a lose-lose proposition for everyone but Prudential.”
Prudential spokesman Bob DeFillippo says the professor is wrong.
“Prudential assumes the vast majority of mortality risk for the participants,” he says. “We also assume all of the investment risk.” He declined to elaborate on what Prudential’s insurance and investment risks are.
The VA says it is taking steps to better help survivors.
Since July 28, when Bloomberg News first reported that Prudential sent checkbooks instead of checks to survivors requesting lump-sum payouts, state and federal officials have demanded the retained-asset system be investigated and reformed. The VA itself launched a probe of its life insurance program the day the first story was published.
The next day, New York Attorney General Andrew Cuomo launched what he called a “major fraud investigation” of Prudential and other life insurers.