Prudential Insurance and Alliance Accounts

Life insurance policy in a brown folder
Image courtesy of [DNY59] / Getty Images.

In 2010 a media firestorm erupted over the Prudential Insurance Company's use of Alliance Accounts to pay life insurance benefits. The insurer was using these accounts to pay benefits under group life insurance policies purchased by U.S. Servicemembers. This article will explain what Alliance Accounts are and why they are so controversial.

Retained Asset Accounts

Prudential's Alliance Account is a type of retained asset account.

Retained asset accounts have been used by life insurers since the mid-1980s. They were developed as an alternative to a lump-sum payment made via a bank check. A retained asset account is a type of checking account created by an insurer for paying benefits. The insurer establishes an account in the name of a beneficiary and then deposits the proceeds of a life insurance policy. The beneficiary withdraws the funds by writing checks on the account.

A retained asset account can be useful when a survivor is too distraught at the death of a family member to make investment decisions. The beneficiary can leave the funds in the account until he or she is ready to make those decisions. The survivor can withdraw any or all of the funds at any time by writing a check.

Insurers make money on retained asset accounts by investing the money held in the accounts. The rates they earn on their investments are considerably higher than the rates they pay to holders of the accounts.

Disadvantages

For beneficiaries, retained assets accounts have some disadvantages.

  • Low Interest Rate The interest rate paid on a retained asset account is very low. A typical rate is .5%. Beneficiaries can earn a better return by transferring the money into a certificate of deposit, money market fund or other financial investment.
  • Not FDIC Insured Funds held by an insurance company are not insured by the FDIC. However, most states have a guaranty fund that will protect an account holder if the insurer becomes insolvent or is otherwise unable to pay benefits.
  • Not a True Checking Account A retained asset account is not a true checking account. For one thing, the "checks" may be drafts, which merchants may not accept in exchange for purchases. Secondly, account holders cannot deposit funds, say from a paycheck, into the account.
  • Delayed Access A survivor who wants to use all of the funds immediately must wait until the account has been established and he or she has received checks from the insurer.

U.S. Military Life Policies

Prudential administers group life insurance policies purchased by active and former members of the U.S military. The policies are sold through the U.S. Department of Veteran Affairs (VA). Active members are insured under the Servicemembers Group Life Insurance (SGLI) program. Veterans are insured under the Veterans Group Life Insurance (VGLI) program. Prudential has administered these programs since 1965.

Until 2009, a written contract between Prudential and the VA stipulated that if a beneficiary under the SGLI or VGLI requested a lump-sum payment, the payment would be made via a single check.

However, in 1999 Prudential began distributing lump-sum payments into Alliance Accounts per a verbal agreement with the VA Beneficiaries who requested a lump-sum payment assumed they would receive a check for the full amount. Instead, they received a checkbook and information about their Alliance Account.

In 2009 the verbal agreement that permitted the use of Alliance Accounts was put into writing. This caused a media uproar. Prudential and the VA were accused of engaging in deceptive practices and taking advantage of Servicemembers' survivors. They were also denounced for putting benefits at risk by placing them in accounts not insured by the FDIC.

Current Benefits Policies

In late 2010, the VA and Prudential changed the way benefits are paid. Beneficiaries now have four options to choose from when applying for benefits.

They can receive payment by any of the following:

  • An Alliance Account
  • Electronic transfer into a bank account
  • Check for a lump sum payment 
  • Installment payments over 36 months 

If the beneficiary does not make a choice, Prudential will deposit the funds into an Alliance Account.

Lawsuit

In 2014 Prudential settled a class-action lawsuit for $39.2 million. The plaintiffs alleged that Prudential violated federal law, and breached both the contract and its fiduciary duty to beneficiaries. Prudential denied the allegations but settled the suit to avoid the cost of litigation.

Other life insurers have been sued over their use of retained asset accounts. The results have been mixed. Insurers have won some cases and lost others. In 2014 the U.S. Supreme Court refused to review a decision by a lower court that ruled in an insurer's favor. Meanwhile, many life insurers are still using retained asset accounts to distribute benefits. Beneficiaries of life insurance policies can avoid these accounts by choosing an alternate method of payment.

Article edited by Marianne Bonner