Five plaintiffs joined the original plaintiff Monday in the lawsuit, which was filed in July in U.S. District Court in Springfield, Mass. It accuses Prudential of profiting from the dead soldiers' policies with bookkeeping maneuvers and misrepresenting the way the beneficiaries could collect lump-sum payouts.
Their attorneys are seeking class-action status.
If granted, it could affect tens of thousands of beneficiaries who received payments under group life insurance policies for military members and veterans created by Congress and administered by Prudential.
A spokesman for the Newark, N.J.-based financial giant said Monday that while company officials cannot address the pending litigation, they strongly defend their handling of the money as responsible and deferential to the beneficiaries' grief and needs.
The issue was brought to light after a six-month investigation by Bloomberg Markets Magazine.
"I actually believed that the families of our fallen heroes got a check for the full amount," Secretary of Defense Robert Gates said last month. "So this came as news to me."
survivors like Cindy Lohman, whose son Ryan was killed in Afghanistan, believed they'd be getting checks too.
Instead, they were told their death benefits were being placed in a secure, interest-bearing account. But the funds are actually held in the company's own general corporate account, allowing Prudential to earn the lion's share of the interest for itself.
"I was stunned to find out that 'yeah, I had been duped.'" Cindy said.
The debate centers on Prudential's use of what it calls Alliance Accounts. The accounts are similar to checking accounts and come with a booklet of drafts. Beneficiaries can write drafts to themselves up to the payout's full amount, an option they can pick in lieu of 36 equal monthly installments.
Interest paid to beneficiaries who parked their money in Alliance Accounts in the last several years has ranged from 0.5 to 1.5 percent, according to the lawsuit.
But the plaintiffs say the checks are equivalent to an IOU, and that the money doesn't actually sit in those accounts as of the time of the soldier's death.
They allege Prudential holds the money in its $200 billion general account and earns 5 to 6 percent interest; moves it into an Alliance Account only when the beneficiary requests it; pays out at the lower interest rate; then keeps the difference.
Cristobal Bonifaz, one of four attorneys representing the plaintiffs, said the lost interest would vary greatly depending on how quickly the beneficiaries withdrew the money. It could range from a few thousand dollars up to perhaps $20,000 to $30,000 for people who let their payouts sit untouched for years in Prudential's accounts, he said.
"They didn't tell anybody, 'We're going to make money with it,"' Bonifaz said. "What we're saying to Prudential is, 'You kept investing the money, but that money did not belong to you as of the day that person died, and whatever you made off it, you should give to those persons it was meant for."'
But Prudential spokesman Bob DeFillippo said interest rates on the Alliance Accounts are set to be comparable to checking accounts and money-market accounts. The Alliance Accounts money needs to be more liquid and immediately accessible so it is placed in short-term investments, he said. That money comprises about 2 percent of Prudential's general account, on which the higher interest is earned - a function of the long-term investments it holds, he said.
"This is a very, very difficult time for (beneficiaries) and we do everything we can to make this not any more difficult ... If their intent is to have a lump sum, all they need to do is write a draft to themselves and withdraw it," DeFillippo said.
People who choose Alliance Accounts also are offered free financial counseling services and the interest rate is stated on their confirmation paperwork.
A similar claim against Prudential was thrown out of U.S. District Court last year in New Jersey, where a beneficiary of a non-military life insurance policyholder challenged the Alliance Accounts and alleged Prudential was unjustly enriching itself.
Plaintiffs in the current lawsuit are parents of soldiers who died in Iraq, Afghanistan, El Salvador and after returning to the U.S. They are from Massachusetts, California, Illinois, Maryland, and Texas.
Kevin Lucey of Belchertown, Mass., the lawsuit's lead defendant with his wife, Joyce, said the grief of losing their 23-year-old son, Jeffrey, in June 2004 was so raw that dealing with insurance details was too overwhelming to face right away.
They transferred the policy's proceeds to a bank nine months later, but Kevin Lucey said they remain angry and indignant over what they consider Prudential's misrepresentations to themselves and other families.
"It's totally unacceptable for any company to think they can treat any family that has gone through this kind of trauma, especially military families," he said. "I think it becomes part of our responsibility to make sure no one has to go through anything similar to this."