The package arrived at Cindy Lohman's home in Great Mills, Md., two weeks after she learned her son, Ryan, a 24-year-old Army sergeant, had been killed by a bomb in Afghanistan.
The thick envelope from Prudential Financial Inc., which handles life insurance for the Department of Veterans Affairs, held a letter about Ryan's $400,000 policy. And something that looked like a checkbook.
The letter told Lohman that the full amount of her payout would be placed in a convenient interest-bearing account, allowing her time to decide how to use the benefit. "You can hold the money in the account for safekeeping for as long as you like," the letter said.
In tiny print, in a disclaimer Lohman said she didn't notice, Prudential disclosed that what it called its Alliance Account was not guaranteed by the Federal Deposit Insurance Corp.
Lohman, 52, left the money untouched for six months after her son's August 2008 death. As time went on she tried to use one of the "checks" to buy a bed, and the salesman rejected it. That happened again this year when she went to a Target to purchase a camera.
Lohman says she believed her son's life insurance funds were in a bank insured by the FDIC. That money — like $28 billion in 1 million death-benefit accounts managed by insurers — wasn't sitting in a bank. 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.
"I'm shocked," said Lohman, a public health nurse who helps special-needs children. "It's a betrayal. It saddens me as an American that a company would stoop so low as to make a profit on the death of a soldier. Is there anything lower than that?"
Millions of bereaved Americans have unwittingly been placed in the same position by their insurance companies. The practice of issuing what they call "checkbooks" to survivors, instead of paying them lump sums, extends well beyond the military. In the past decade, these so-called retained-asset accounts have become standard operating procedure in an industry that touches virtually every American: There are more than 300 million active life insurance policies in the United States, and the industry holds $4.6 trillion in assets, according to the American Council of Life Insurers.
Beneficiaries could request a lump sum or write one check for the full amount of the life insurance, plus any interest. But many don't touch the accounts immediately, and some have left funds in the accounts for decades.
Insurance companies tell survivors that their money is put in a secure account. Neither Prudential nor MetLife Inc., the largest life insurer in the United States, segregates death benefits into a separate fund.
Prudential, the second-largest life insurer, holds payouts in its own general account, according to regulatory filings.
MetLife has told survivors in a standard letter: "To help you through what can be a very difficult, emotional and confusing time, we created a settlement option, the Total Control Account Money Market Option. It is guaranteed by MetLife."
The company's letter omits that the money is in MetLife's corporate investment account, isn't in a bank and has no FDIC insurance. "All guarantees are subject to the financial strength and claims-paying ability of MetLife," it says.
Both MetLife, which handles insurance for nonmilitary federal employees, and 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.
Bank of New York Mellon Corp. handles the paperwork and monthly statements for customers with MetLife "checking accounts." The insurance company, not the bank, most recently reported holding about $10 billion in death benefits, in 2008.
Prudential's Alliance Account is helpful to families of soldiers, company spokesman Bob DeFillippo said. "We fully and regularly disclose the nature and terms of the account to account holders. We make it clear that the money can be withdrawn at any time by simply writing a draft."
Metlife spokesman Joseph Madden said his company's customers are very happy with the Total Control Account. "The feedback from TCA customers has been overwhelmingly positive," he said.
Insurance companies — in addition to holding onto the money of survivors, paying them uncompetitive interest rates and giving them misleading guarantees — may be violating a federal bank law.
A 1933 statute makes it a felony for any company to accept deposits without state or federal authorization. Only banks or credit unions can accept deposits, said Arthur Wilmarth, a professor at George Washington University Law School in Washington who has testified before Congress about banking regulations.
Retained- asset accounts could be outlawed because insurers say they deposit money into these accounts and don't have bank charters or banking regulation, Wilmarth said. MetLife also offers its own version of certificates of deposit. "If it swims, quacks and flies like a duck, the court could decide that it is indeed a duck," he said. "You then potentially could have a criminal violation."
The question for the millions with these accounts is whether anything will change. State bank regulators say if there are to be any reforms, they should be made by insurance companies.