A Fallen Hero: How an Insurance Company Profited

(CBS)  In nearly a decade of war in Afghanistan and Iraq, 5,620 Americans have died. Survivors of these fallen heroes are entitled to a life-insurance payment and the government uses a private company to handle it. What happened to the mother of 24-year-old Ryan Baumann of Great Mills, Maryland when she tried to collect serves as a lesson to every military family.

According to a Bloomberg Markets Magazine investigation, insurance companies have been profiting off of the death-benefits of fallen heroes.

"Ryan was a neat kid," said Cindy Lohman - Ryan's mother. "He really wanted to join the Army after 9/11 because he saw that, you know, there were things he could do."

CBS Evening News Anchor Katie Couric reports Sgt. Ryan Baumann was as proud of his mission in Afghanistan as his mother is of him. A soldier with the 101st Airborne, he was stationed in eastern Afghanistan - protecting villagers from the Taliban and providing critical services - like repairing pumps supplying water.

"One of the things that he said to me," Lohman said, "he said 'if anything happens to me, just let the world know we're making a difference over here.'"

But on August 1, 2008, Ryan was riding in a Humvee when he spotted an improvised explosive device, an IED.

"He told his driver, 'go left,' and that placed the IED directly under him," Lohman said.

Baumann was killed instantly. The driver, gunner and medic with him all survived.

It was hard to accept life without her son, until a casualty assistance officer asked her to choose how she would like to receive his death benefits.

Lohman said, "I handed the paperwork back to the poor CAO and said 'I don't want it.' And he was very patient and explained that it wasn't an option and that really I had to accept it and had to decide what to do."

She eventually filed, electing to receive a lump sum of $400,000. But the check never came. Instead, she received a check book and a packet from Prudential saying the money had been placed in its "alliance account" where it was "available immediately" and would "begin earning interest" right away.

Everything seemed fine, until she tried using the checks.

"I was told that the check could not be verified," she said.

When did you realize this was some different kind of checking account?

"Sad to say, it wasn't until the journalist contacted me," she replied.

The journalist was David Evans, award-winning senior writer with Bloomberg Markets Magazine.

"The life insurance company is holding onto their money. And that bothers some people, once they find out," Evans said.

Evans' six-month investigative report, appearing today in the magazine's September issue, reveals that Cindy Lohman's money was being held in Prudential's general corporate account -- accruing interest --most of it going to the insurance giant.

Read the Full Report from Bloomberg

"They're able to create quite a float for themselves. They're able to earn the difference between the small interest rate that they pay to the survivors and the larger rate that they're able to make by keeping this money in their corporate investment account," Evans said.

In fact, in 2008 when Cindy Lohman's statement said she was earning less than one percent interest on her Alliance Account, regulatory filings show Prudential was earning almost 5 percent on its corporate account.

"They figured out a way to create these retained asset accounts, they figured out a way to hold onto that money and actually turn death into a profit center," Evans said.

Evans says the practice of pooling and profiting from death benefits is surprisingly common - and extends well beyond the military.

"We were able to determine that there's $28 billion in a million accounts at more than 120 insurance companies across the U.S.," Evans said.

While Prudential's packet boasts words like "control" and "security" in big bold letters, you'd have to read the fine print to find out that Alliance Accounts are not insured by the FDIC.

"They're increasing their profits on all of our children's death benefits. It's sad," Lohman said. "Doing it in a way that puts the money at risk."

They may be turning profits, but at least one veterans' advocate says, any insurance company doing this is "morally bankrupt."

"This is outrageous, that a large insurance company is taking advantage of families at the very time that the American public expects that they be provided everything that they need," said Paul Sullivan of the Veterans for Common Sense.

Outrageous perhaps, but is it legal?

"It doesn't appear to be criminally unlawful," said Adam Scales, Associate Law Professor, Washington and Lee University. "But, it's likely to be civilly unlawful and raises some difficult regulatory boundary questions."

In a statement today,Prudential today told CBS News, "We fully disclose the nature and terms of the account to accountholders, including the interest credited to their account. 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. The interest rate paid to accountholders has been comparable to other on-demand accounts…"

Full Prudential Statement

The Department of Veterans Affairs told us it's deeply concerned and is conducting a full investigation of the life insurance companies and their procedures.

Meanwhile Cindy Lohman says she closed her alliance account on July 8th, and is still waiting to receive the balance. Whenever the money comes, it will be little consolation for a family that's already paid the highest price.

[cgreen23]

It seems to me that CBS is playing the role of Fox News in a replay of the Shirley Sherrod story of a few weeks ago.

The story is grossly out of context. The vast majority of these accounts have nothing to do with the military; they've been around for decades; the state insurance commissioner in Connecticut says they've NEVER had a complaint; the complaints are largely trivial.

Yet CBS, without checking even some of the facts in the original Bloomberg article itself, perpetuates the flaming in prime time by drawing on the Hollywood villain theme of dead soldiers, patriotism, grieving mothers, and the evil denizens of Wall Street.

Predictably, the knee-jerk response of mainstream media and politicians was right there.

The story here is not a greedy wall street firm; it's irresponsible behavior by Big Media and politicians.

I've tried to carefully dissect this point of view at http://trustedadvisor.com/trustmatters/863/The-Insurance-Industry-Is-Getting-the-Shirley-Sherrod-Treatment

Read WillyRC above also for a note of sober reality.

CBS should have thought like him, sought out people like him. That would have been what used to be called journalism.

[MaxSped]

If this were an individual, he would already be in jail, his profits would have been confiscated and he would be expected to pay a huge fine. Since this is big-wheel in the insurance industry with bookoos of lobbiest, they may get a slap on the wrist and an admonition, bad boy, but other than that it will be white-washed and business as usual.

Can you tell I am disgusted?

[jdub4110]

This is such a terrible story. Prudential sets these accounts up for all employers not just for the armed services. The money is available immediately, full the full balance if they choose, if the beneficiary cashes the check (Alliance Account Checking account check) into their bank account or goes to a credible financial institute and verifies their identity to collect the amount that is paid to them from Prudential.

You given no proof what so ever that any beneficiary has not able to cash their checks immediately when they have given their proper identity to a financial institute.

The story here is that CBS News journalism is corrupt. I hope Prudential sues for you slander!!!

[MaxSped]

Hey,jdub, you did NOT read the article did you? "She eventually filed, electing to receive a lump sum of $400,000." - this quote is from the article. In lieu of the Lump Sum Settlement, Prudential sent her a packet and when one of the packet-provided-checks was presented for payment, refused to honor it. Good Boy, Prudential - max income for your investors plus big bonuses for top administrtors.

[bobnjersey]

["This is outrageous, that a large insurance company is taking advantage of families at the very time that the American public expects that they be provided everything that they need," said Paul Sullivan of the Veterans for Common Sense.

Outrageous perhaps, but is it legal? ]

of course it's legal.

rating junk investments (cdos) that nobody could understand as triple a ... when they weren't anything close to this was legal too ... and these companies are still in business rating current investment vehicles.

this is the tip of the iceberg for the scams of the insurance industry.

in fact ... it will likely be 'the insurance industry' that will be next to fail miserably ... and everyone will say 'there was no way we could have known this was going to be a problem'.

the complete failure of our representative system is far reaching and likely the most signifigant threat to our national security ... as the assets of the country are squandered and embezzled thru legal means.

[knowerseeker]

Sigh.... Capitalism at its finest.

[Maharet111]

Hmm what other corporation could I think of that takes money from you, earns interest on it, and then pays you out when you ask for it?

For those of us that get a tax refund every year, where do you think your tax money sits at until you ask for it back!

Another thing I wonder about this article and reading some of the comments below..if the story hadn't been about someone who served in the armed services, would anyone feel that strongly?

[bobnjersey]

[For those of us that get a tax refund every year, where do you think your tax money sits at until you ask for it back! ]

it doesn't sit anywhere. we run annual deficits which pile on top of the national debt. every bill congress enacts requires more borrowing to fund the effort.

the money you're paying in taxes is already spent ... long before it's ever received.

[cgreen23]

Maharet111, you raise a very good point. Had the subject matter not used a dead soldier's mom, thus triggering half the emotional responses in a great villain story (the other half being evil faceless wall street company), it would not have gotten nearly the impact it did. And since the vast majority of these policies are NOT for the military, it comes close to being very misleading that CBS chose to focus just on the military example. Cue the American flag, kittens, 4th of July; hand out the pitchforks and torches, let's go get us some insurance companies!

[WillyRC]

This is much ado about nothing. I served in the Marine Corps for 29 years and saw several sad, but predictable, situations prior to 1999, where a survivor received a lump sum check and burned through the money in a few months. That is why the Department of Defense agreed to the "checkbook" method currently in use. It it also used by the Office of Personnel Management for civilians. If you really think it's a good idea to hand a $400,000 insurance check (and a $100,000 death gratuity check) to an 18-year old survivor (or a 52-year old grieving mother as mentioned in the story), then go ahead and support the return to a lump sum check. I understand that the insurance company is investing the money it holds and turns a profit on it. I also know that the bank where a survivor deposits a check does the same thing. So long as the Prudential doesn't default on their obligations, they have every right to keep their administrative costs down by investing the money they hold. Come on people, look at the whole picture. Casualty Assistance Officers tell every survivor that as soon as they get the "checkbook" they can cash it in. The smart ones also tell the survivors to resist the temptation to spend the money quickly. The "checkbook" method puts a little bit of a brake on the urge to spend.

[cgirltruck]

It may seem like a really good idea but allowing these insurance giants to profit off our dead servicemembers' benefits is wrong. No way around that. Especially when, as the story stated, the mother couldn't access the money and the money was earning almost nothing compared to what the insurance company was earning on that same money. Disgusting.

[stsebastian]

And? These people are adults. It's THEIRS to do what they want with, regardless if they "burn" through it or invest it. People should be told to see a financial advisor of their own choosing and then leave it at that. It's nobody's business but theirs.

[spartyb]

i do think that it would be a good idea for the insurer to make the "default" scenario a full payoff via check or transfer. they should be allowed to offer the payee options and if that individual decided to opt in to one of their plans then so be it. also, with a payoff this size, the payee could certainly afford some advice from a CPA or attorney, for a couple hundred bucks it would be money well spent. at the end of the day people must remember that this is a business transaction, so as always- caveat emptor.

[bobnjersey]

[at the end of the day people must remember that this is a business transaction, so as always- caveat emptor.]

who's the 'buyer' (emptor) in an insurance claim payout for fallen soldier life insurance policy?

[wittytwo]

FormerMarine2009,

I still think anyone is better off having an electronic deposit made to a bank account than having a check that large sent to them by snail mail. If you signed up for an electronic transfer to a family member's account, you would have no guarantee that the account would still exist when you died or that the state law would allow your survivor to withdraw money from a joint account. I didn't say that Prudential would insure your account, I said that insurance companies commonly spread the risk with other insurance companies. This keeps the insurance companies viable, as none of them take the whole of a major loss. As for it being an investment account, how do you think banks, insurance companies, etc., earn the money to pay interest or the money to pay the face value of the policy? As for the interest rate that is paid to a beneficiary, that is personal experience. I like a good debate also:-)

[formermarine2009sdad]

All this about trying to apply human morals to a corporate entity is, at best, nieve. The fact is that a Corporations only responsibility is to its stockholders and the law. If it's legal and benifits the Corporation (i.e. its stalk holders), then it's fine. If you don't like the practices of a company, make it illegal. Otherwise, don't complain. It's not a person, it's an entity that is only obligated to follow the laws, and in the case of Professional Corporations (such as health care, legal,engineering, etc.) whatever guidlines the professional watch-body (i.e. AMA, Legal Bar, Board of Engineers, etc.) places on it.

[wittytwo]

It seems to me that Prudential is doing the right thing with these accounts. With all the mail theft and identity theft today would you really want Prudential to put a check for $400,000 in snail mail?
Also, immediately after the death of a loved one the beneficiary is more concerned with grief than with money. In particular, most very young widows know little about financial management and have no idea how to invest such a large sum of money plus they are busy with the grief and mourning for quite a while after the death.
When you decide to make an investment, you write a check to yourself and deposit in your checking account; when the check clears you pay for the investment. Or you can write a check for the whole amount and have it deposited in your bank checking account.
Everyone should be aware that a single bank account is insured only for $100K by the FDIC; this FDIC amount has been raised temporarily to $250K but will automatically drop back to $100K unless Congress extends it.
The way that Prudential does this allows the beneficiary to leave the money in the Prudential Alliance account until she is ready to invest it or spend it and draw interest on it while it is on deposit. This gives you the opportunity to recouperate from the grief and make intelligent financial decisions.
Prudential pays more in interest than the 1% claimed on the show. The APR is closer to 3.04%. If you put your money in a money market account or a CD, the financial institution invests your money and keeps a percentage of the return just like Prudential does.
Most investment accounts are not covered by the FDIC. In addition, Prudential is an insurance company, and insurance companies commonly spread the risk of their investments with other insurance companies, e.g., the insure their accounts with other insurance companies.

[FormerMarine2009]

I disagree with you here. And a few of your facts are wrong. If you go onto the VA website you can view a statement issued BY Prudential executives stating that they do not insure ANY of the funds at all because of contract agreements and they do in fact pay the beneficiary less that one percent interest. And when it comes to identity theft, when I was filling out the forms I remember being given the option to have my family sent one lump sum or payments over several years. There was also an option for direct deposit which takes a paper train out of the equation altogether. However, I did not have my families back informations with me so I simply put a name and address. And in my opinion, Prudential should not be putting these funds into an "investment" account at all. When I signed my family up to receive those funds in the event of my death I had no intention on investing it for them. I signed that I wanted it to go directly to my family. And I believe I should be able to decide who gets MY benefits and WHEN and WHERE they should be sent. I signed them up for $400,000. Not a bank account. And Prudential should have no right to make that decision for me. This isn't a company taking the initiative to help a grieving family. The is a company taking advantage of the vulnerable state of suffering parents and spouses. It should be a crime and they should all be prosecuted.