Federal Regulation

CFA Urges Secretary Shinseki to Take Action Against Life Insurers Denying Cash Payouts to Service Members’ Families

The Honorable Eric Ken Shinseki
United States Department of Veterans Affairs
810 Vermont Avenue, NW
Washington, DC 20420

Dear Secretary Shinseki:

The Consumer Federation of America (CFA) urges the Department of Veterans Affairs (VA) to take immediate action to protect the families of veterans from the unscrupulous payout practices of some life insurers, as described in the attached Bloomberg article, “Fallen Soldiers’ Families Denied Cash Payout as Insurers Profit.” According to the report, some of these service member families are being denied immediate access to life insurance proceeds that they should receive, while insurers retain control of these funds and collect a profit off of the interest earned on them.

The practice of life insurance companies depositing their customers’ life insurance money into their own accounts and sending “checkbooks” to these families, instead of transferring the funds that they owe directly into their bank accounts, is unfair and should be stopped. This tactic is misleading because the checkbooks do not contain live checks, even though they look very similar to live checks. They are essentially IOUs. Furthermore, because the money is deposited into insurers’ accounts, the money is not insured by the FDIC. These funds could also be unrecoverable if the insurer goes out of business. (Some life insurers are presently in serious financial shape due to significant investments in commercial mortgages and other adverse impacts from the economic situation.) Life insurers are making a tidy profit on money that should be immediately distributed to families, often without properly notifying families about what they are doing with these payouts.

While CFA applauds the decisions of the Department of Veteran Affairs and the New York State Attorney General’s Office to investigate these practices, the VA should also take immediate action to ensure that the families of deceased service members are being treated properly when a life insurance payout is due. First, I urge you to immediately remove all insurers that currently engage in this practice from your list of participating insurers. Secondly, I suggest updating the excellent booklet, “VA Life Insurance Programs for Vets and Service members” to warn veterans and service members of this scam and to urge families to get their payouts as soon as possible when a covered veteran or service member dies. By taking these small steps, the VA can help ensure that families of service members make educated decisions about life insurance policies and can protect themselves from becoming victims of this scam.

If I or the Consumer Federation of America can be of any assistance, please do not hesitate to call upon us. I served as Federal Insurance Administrator under Presidents Ford and Carter and as Texas Insurance Commissioner, so I would be more than happy to assist if you need any advice.

Yours truly,

J. Robert Hunter
Director of Insurance
(207) 864-3953