"Alliance Accounts" -- What do you Think?

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Bloomberg.com is running a story by David Evans that will appear on the newsstands beginning August 16 in the September issue of Bloomberg Markets magazine.

Admittedly the story has little to do with business insurance.

Rather, the article is about "Alliance Accounts." This is the way Prudential Financial pays out death benefits to beneficiaries of our fallen soldiers. Our readers include insurance professionals, small business people, and financial planners, so I'd like some feedback on this practice.

Prudential Financial handles life insurance for the Department of Veterans Affairs. According to the article, and discussed in Prudential's response, survivors of service men and women are told they'll get a $400,000 life insurance payout. Instead the beneficiaries receive a check book for the Alliance Account. Prudential promises to hold the money in safekeeping for as long as families would like, saying it will pay them 0.5 percent interest.

Where are the benefits held? Prudential's general corporate account according to the article.

Is the Alliance Account FDIC insured? Nope.

Does it work? Not according to Cindy Lohman whose son Ryan was killed in Afghanistan, "she tried to use one of the 'checks' to buy a bed, and the salesman rejected it. That happened again this year, she says, when she went to a Target store to purchase a camera on Armed Forces Day, May 15."

Does Prudential make money? Yep. "It was being held in Prudential's general corporate account, earning investment income for the insurer.

Prudential paid survivors like Lohman 1 percent interest in 2008 on their Alliance Accounts, while it earned a 4.8 percent return on its corporate funds, according to regulatory filings."

How much money? "[L]ike $28 billion in 1 million death-benefit accounts managed by insurers."

I did some more digging and came across the 2003 testimony of Thomas Lastowka, Director, Philadelphia VA Regional Office, And Insurance Center Department Of Veterans Affairs, before The House Committee On Veterans' Affairs
Subcommittee On Benefits. His testimony praises Prudential and Mr. Lastowka stated in that testimony:

"In June 1999, SGLI and VGLI beneficiaries began receiving their proceeds through a checking account rather than by the traditional single check for the full amount of the insurance proceeds. This checking account is called an "Alliance Account." The beneficiary receives a checkbook for an interest bearing account from which the beneficiary can write a check for any amount of $250 or more, up to the full amount of the proceeds. Alliance Accounts earn interest at a competitive rate, are guaranteed by Prudential Insurance Company of America."

This begs the question whether the accounts are competitive and "guaranteed." MetLife, another insurer identified in the article, prefaces its "guarantee" as follows: "All guarantees are subject to the financial strength and claims-paying ability of MetLife." Maybe that "guarantee" had more meaning prior to the 2008 collapse and bailout of insurers. Competitive? The article finds, "Prudential paid 0.5 percent interest in July to survivors of government workers and soldiers. That's less than half of the rate available at some banks with accounts insured by the FDIC up to $250,000."

In that same testimony in 2003, Mr. Lastkowa requested that Prudential receive a management fee:

"Since the origin of the program, Prudential and the companies that provide reinsurance have not received a profit for their participation in the program (my emphasis). They have received only reinsurance premiums in return for providing such coverage to the program. In its request for the new management fee, Prudential arrived at the $400,000 amount by analyzing what it would have earned on the SGLI Program had the risk charge been calculated in a manner similar to the risk charges used on other large group life insurance cases. The SGLI Program has been charged substantially less for risk charge than these other clients."

To be fair, Prudential has issued a response stating that the company has "had years where we have made a profit, we have also had years when we had losses because we assume the investment risk for the money in the Alliance Account."

I would be interested in your comments.
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