Prudential Insurance and Alliance Accounts

An Alliance Account Is Not a True Checking Account

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The U.S. Department of Veteran Affairs (VA) sells life insurance to active and former members of the U.S. military. The policies are administered by the Prudential Life Insurance Company of America. When policy beneficiaries apply for benefits, they can choose how the funds will be distributed. One option is for the insurer to deposit the money into an Alliance Account. Before they select this option, beneficiaries should understand what an Alliance Account is and how it works.

Retained Asset Accounts

Prudential's Alliance Account is a retained asset account, a type of checking account created by an insurer for the purpose of 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 can withdraw all or a portion of the funds at any time by writing a check. The insurer pays interest on the funds that remain in the account.

Life insurers developed the retained asset account in the mid-1980s as an alternative to a lump-sum payment made via a bank check. This type of account can be useful when a survivor is too distraught at the death of a family member to make financial decisions. The beneficiary can leave the funds in the account and decide what to do with them later.

Insurers make money by investing the funds held in retained asset 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. Beneficiaries may 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 a depository for life insurance proceeds only. It is not a true checking account. The account holder cannot deposit funds, say from a paycheck, into the account. Moreover, the "checks" may be drafts, which merchants may not accept in exchange for purchases.
  • Delayed Access. To utilize funds from the account, the survivor must obtain checks from the insurer, write a check on the account, and then wait to receive a draft.

U.S. Military Life Policies

Since 1965, Prudential Insurance has administered life insurance policies sold by the VA to current and former members of the military. The VA offers two programs. The Servicemembers Group Life Insurance (SGLI) program covers active members of the U.S. military. The Veterans Group Life Insurance (VGLI) program covers U.S. military veterans.

Prudential has been criticized for the way it has handled death benefits under the military life insurance programs. In 1999, Prudential and the VA made a verbal agreement allowing the insurer to distribute lump-sum payments into Alliance Accounts. This agreement contradicted a written contract between the insurer and the VA, which stipulated that any beneficiary under the SGLI or VGLI who requested a lump-sum payment would be paid via a single check. Beneficiaries expected to receive a check for a lump-sum payment. Instead, they received a checkbook and information about their Alliance Account.

Prudential's use of Alliance Accounts to pay death benefits under SGLI and VGLI policies came to light in 2010, and a media firestorm erupted. Prudential and the VA were accused of engaging in deceptive practices and taking advantage of service members' 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
  • Check for a lump sum payment
  • Electronic transfer into a bank account
  • Installment payments over 36 months 

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

Lawsuits

In 2014, beneficiaries of the SGLI and VGLI life policies filed a class-action lawsuit against Prudential. The plaintiffs alleged that the insurer had violated both federal law and the SGLI and VGLI contracts, and breached its fiduciary duty to beneficiaries by failing to pay benefits in lump sums. Prudential denied the allegations but settled the suit for $39.2 million. In 2018, another class-action lawsuit against Prudential was settled for $9 million. The case involved life insurance policies issued to employees of two private companies, Con-Way Incorporated and J.P. Morgan Bank. The court determined that the insurer had breached its fiduciary duty to the plaintiffs when it paid benefits into Alliance Accounts rather than as a lump sum as required by the benefit plans.

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. 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.