N.Y. AG Investigates Prudential and MetLife for Retained-Asset Accounts

New York Attorney General Andrew Cuomo has begun an investigation of accounts set up on behalf of recipients of life insurance policy payouts, accusing certain firms of cheating the recipients out of investment proceeds those accounts earned. But industry representatives say the accounts are a customer service, and policy recipients are free to pull all of their funds out at any time.

Cuomo announced he has issued subpoenas to Prudential Financial Inc. and MetLife Inc., specifically looking into their handling of policies for federal employees, including the death benefits of members of the military.

These "retained-asset accounts" are a common industry service in which the companies set up accounts -- similar to an interest-bearing checking account -- in which recipients can keep the policy assets if they choose, even writing checks from it. Cuomo's office says the accounts -- which are not insured by the FDIC -- have been known to earn as much as as a 4.8% return while paying out as little as 0.5% interest. The insurers, Cuomo claims, are not disclosing enough information about the nature of the accounts. The subpoenas are requesting a broad range of data, "including but not limited to the production of information relating to how and when beneficiaries are informed of the terms and conditions relating to the retained-asset accounts, as well as data relating to the difference between interest earned by the insurance companies and interest earned by the beneficiaries," according to Cuomo's office.

The U.S. Department of Veterans Affairs has launched its own investigation, specifically into the "Alliance Account" system managed by Prudential. "VA is conducting a full investigation into the life insurance company and their procedures in this program," Mike Walcoff, acting undersecretary for the Veterans Benefit Administration, said in a statement, and will decide "whether to continue the use of the Alliance Account program." The agency will also contact about 10,000 "current survivors" to remind them of their options.

"We fully disclose the nature and terms of the account to account holders, including the interest credited to their account," said Prudential Financial (NYSE: PRU), in a statement. "We also make it clear to beneficiaries that they can withdraw some or all of their money immediately or at any other time and without delay. And, we offer third-party financial counseling to beneficiaries of service members to help them make the best decisions about the use of these funds and other governmental benefits." The company points out that, in investing each account's funds, it assumes the investment's risks if it were to lose money. "While we have had years where we have made a profit, we have also had years when we had losses."

The veterans agency's life-insurance handbook does include an explanation for how the accounts work, without suggesting the account holder will receive all gains from the account: "Insurance proceeds are deposited in the member 's name and the member can write drafts for any amount up to the full amount of the proceeds. The amount of interest earned is at a competitive rate and is guaranteed by Prudential. Through the Alliance Account, the member has immediate access to any or all of their money."

MetLife (NYSE: MET) isn't involved in the military program, but it does provide life insurance to federal employees -- including the use of its retained-assets "Total Control Account." "We believe that TCA holders appreciate the benefits of the TCA, and many have told us so," according to a company statement. "Our materials carefully explain the TCA to our customers so that they understand that they can use their checkbooks to withdraw all of their benefits immediately or over time as they choose. They have full access to their funds and earn a guaranteed minimum interest rate that exceeds what they could earn on most money market accounts."

MetLife, whose spokesman said the company hadn't yet received its subpoena, also pointed out that the New York State Department of Insurance has reviewed the program multiple times.

The National Association of Insurance Commissioners dealt with this issue 15 years ago, approving a sample bulletin commissioners could send to insurers in their states. That model bulletin included this suggested language from the regulators to insurers: "These accounts are designed to be a temporary repository of funds while the beneficiary considers the available options. While the majority of insurers handle these accounts in an appropriate manner, the potential for misunderstanding is present."

"My reaction to it was that most consumers would choose the lump sum, so we're looking at a regulation that would make that the default position," said Joel Ario, Pennsylvania's insurance commissioner. But he said he's heard from people who also like the idea of the accounts, so he hasn't yet decided the best course. It hasn't been a big area of consumer complaint, he said, but added, "I do think we'll do something here to expand disclosure."

MetLife stock was trading at $40,20 on the afternoon of July 29, up 2.29% from the previous close. Prudential Financial was trading at $56.04, up 1.08%. Prudential of America Group's insurers have current Best's Financial Strength Ratings of A+ (Superior), and most of the insurers within Metropolitan Life & Affiliated Cos. Group also have ratings of A+ (Superior).

(Jesse A. Hamilton, Washington bureau manager: [email protected])