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"Alliance Accounts" — What do you Think?

By July 29, 2010

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Bloomberg.com is running a story by David Evans that will appear on the newsstands beginning August 16 in the September issue of Bloomberg Markets magazine.

Admittedly the story has little to do with business insurance.

Rather, the article is about "Alliance Accounts." This is the way Prudential Financial pays out death benefits to beneficiaries of our fallen soldiers. Our readers include insurance professionals, small business people, and financial planners, so I'd like some feedback on this practice.

Prudential Financial handles life insurance for the Department of Veterans Affairs. According to the article, and discussed in Prudential's response, survivors of service men and women are told they'll get a $400,000 life insurance payout. Instead the beneficiaries receive a check book for the Alliance Account. Prudential promises to hold the money in safekeeping for as long as families would like, saying it will pay them 0.5 percent interest.

Where are the benefits held? Prudential's general corporate account according to the article.

Is the Alliance Account FDIC insured? Nope.

Does it work? Not according to Cindy Lohman whose son Ryan was killed in Afghanistan, "she tried to use one of the 'checks' to buy a bed, and the salesman rejected it. That happened again this year, she says, when she went to a Target store to purchase a camera on Armed Forces Day, May 15."

Does Prudential make money? Yep. "It was being held in Prudential's general corporate account, earning investment income for the insurer. Prudential paid survivors like Lohman 1 percent interest in 2008 on their Alliance Accounts, while it earned a 4.8 percent return on its corporate funds, according to regulatory filings."

How much money? "[L]ike $28 billion in 1 million death-benefit accounts managed by insurers."

I did some more digging and came across the 2003 testimony of Thomas Lastowka, Director, Philadelphia VA Regional Office, And Insurance Center Department Of Veterans Affairs, before The House Committee On Veterans' Affairs
Subcommittee On Benefits. His testimony praises Prudential and Mr. Lastowka stated in that testimony:

"In June 1999, SGLI and VGLI beneficiaries began receiving their proceeds through a checking account rather than by the traditional single check for the full amount of the insurance proceeds. This checking account is called an "Alliance Account." The beneficiary receives a checkbook for an interest bearing account from which the beneficiary can write a check for any amount of $250 or more, up to the full amount of the proceeds. Alliance Accounts earn interest at a competitive rate, are guaranteed by Prudential Insurance Company of America."

This begs the question whether the accounts are competitive and "guaranteed." MetLife, another insurer identified in the article, prefaces its "guarantee" as follows: "All guarantees are subject to the financial strength and claims-paying ability of MetLife." Maybe that "guarantee" had more meaning prior to the 2008 collapse and bailout of insurers. Competitive? The article finds, "Prudential paid 0.5 percent interest in July to survivors of government workers and soldiers. That's less than half of the rate available at some banks with accounts insured by the FDIC up to $250,000."

In that same testimony in 2003, Mr. Lastkowa requested that Prudential receive a management fee:

"Since the origin of the program, Prudential and the companies that provide reinsurance have not received a profit for their participation in the program (my emphasis). They have received only reinsurance premiums in return for providing such coverage to the program. In its request for the new management fee, Prudential arrived at the $400,000 amount by analyzing what it would have earned on the SGLI Program had the risk charge been calculated in a manner similar to the risk charges used on other large group life insurance cases. The SGLI Program has been charged substantially less for risk charge than these other clients."

To be fair, Prudential has issued a response stating that the company has "had years where we have made a profit, we have also had years when we had losses because we assume the investment risk for the money in the Alliance Account."

I would be interested in your comments.

July 30, 2010 at 11:44 am
(1) Dennis says:

I just checked with chase Bank and they are paying .5% on $50,000 + in checking. Bankrate.com says the average car loan is 6.5%. I guess banks don’t make money. Oh we want people to have jobs. Oh that taxes profits.

August 1, 2010 at 1:01 am
(2) Syl's Son says:

It looks like banks can always find a way to move money around to make their coffers like a certain way. Banks make money otherwise they wouldn’t be in business.

August 1, 2010 at 5:15 pm
(3) nurseliz27 says:

This is exactly what Prudential did to my family! I was unaware that I could not write a check for services anywhere either. Glad I didn’t try to do so. Karma is a funny thing though…

August 3, 2010 at 12:12 am
(4) Matthew says:

I just looked at Bank of America’s 2009 financial statements. It looks like they earned 3.5% interest rate on assets and paid 1.4% interest.

And the interest rate offered is competitive. Average interest rates in the private market are about 0.25% for savings accounts and 0.10% for checking accounts. To get higher interest, you need to shop around and sacrifice access to the money.

The beneficiaries are losing something in security by having accounts guaranteed by insurance companies rather than by the FDIC… but remember, the insurance company got bailed out. (AIG)

August 31, 2010 at 2:11 pm
(5) Andrew says:

1. Nobody has lost any money with this.
2. It pays more than a savings account.
3. There may be some convenience issues but I regard them as minor.
4. Seems to me that all you have to do is write the check and you can put the money in the bank.

Am I missing something?

October 9, 2010 at 5:40 pm
(6) Erin says:

I realize the situation may be very different for beneficiaries of veterans versus beneficiaries of civilians insured through Prudential. Still, my grandmother passed away two weeks ago and I, as the beneficiary, received a packet of information about the Alliance Account. Supposedly, “my account” will earn 3% interest annually. That’s a much better rate than I’ve been able to find anywhere else. I haven’t tried to write a check yet (I’m actually paying my car off today…) so I’m really hoping those “glitches” have been fixed. Even if Prudential is making more money than we are on our money, they’re still giving us more for it than anyone else. Assuming the market doesn’t crash and lose everything. . . .

November 8, 2010 at 8:37 pm
(7) mary says:

When did the VA crawl into bed with Prudential. This is wrong. I shoul have to choice of putting my money where I choose not where the Government tell me I have to put it. Something is very wrong her and there needs to be a Criminal investigation. I am Writing Barbara Boxer and I am gonna bitch.

December 17, 2010 at 11:21 pm
(8) Jesse says:

I received my Alliance Account packet in the mail today right before I was going out of town before the holidays. I assumed that the packet came just in time and I would be able to use these checks that came int he checkbook if any emergencies arose. Well come to find out, if I were to deposit one of these checks in me own personal bank account it would take 3-7 days before the funds were available to me. In addition to this I also come to realized that these checks are accepted NOWHERE! Since they are just drafts from the Prudential Alliance Account, these “checks” do not even carry certain bank account identification information that can be verified through places like telechek to make sure the funds are actually available. on the check itself it says “PAYABLE THROUGH JP MORGAN CHASE” but if you were to call them and ask them about the Alliance Account they act as if they have no clue of what you’re talking about. Even Chase bank says any check from this Alliance Account that goes through them is subject to being held for days just like it would if it ran through any other bank or your own personal bank. (cont)

December 17, 2010 at 11:24 pm
(9) Jesse says:

Prudential nor JP Morgan Chase will even wire or direct deposit any of the funds into your own personal account to make it easier for you to have access to it. It seems they guarantee it and make it difficult for you to get it from them. After reading more into this from articles such as these, I have decided to withdraw all of the funds from this account and place them into my own FDIC insured bank. Yes, the interest difference might be significant but I know that the funds will be secured. With these checks I received being borderline useless anyways, if I ever happen to come into a bind, I will have access to the funds if I retain them myself. The $250 minimum to even write one of the checks is easier to uphold than expected because apparently you can only use them at a bank. This process needs to be reviewed and handled differently. Survivors are getting cheated, shorted, and given the runaround constantly. I have a funny feeling that the people making these decisions and operating this process this way do not and would not have their insurance in account like this.

January 3, 2011 at 9:27 am
(10) Dan says:

I have an Alliance account from a life insurance policy. It pays 3.0 per cent. Much better rate then any savings account. I deposited a check at Chase bank on Dec 11,2010 and the funds were available the same day.

May 13, 2011 at 11:16 am
(11) DanB says:

The checks aren’t supposed to be used for anything other than depositing into your own regular banking account. This is similar to how a home equity or personal line of credit works. However, I think this is a poor approach to handling a benefit claim payout as the average consumer has never been educated on the differences between draft accounts and it simply creates frustration.

July 26, 2011 at 10:15 pm
(12) Judythe Ann says:

My husband passed away suddenly in January. Prudential sent me my Alliance packet immediately after I turned in his policies. I used one of the checks to pay his funeral expenses and haven’t touced the remainder of the funds. Each month I receive a statement showing the 3% interest gained. To make even half that amount I would have to tie my money up in time certificates.
My worry now is with the economy in the state it’s in will these funds be safe? Should I take the money and forget the interest?

August 1, 2011 at 4:33 pm
(13) MaryAnn says:

My mother passed away in 2008 and I rec’d my Alliance Account packet shortly after filing the claim. I’ve been earning 3% on that money ever since and receive regular statements from them showing the interest earned. I think earning 3% interest is great considering most local banks don’t even come close to that rate for their checking or savings accounts. Even some of the CDs don’t make that much. I haven’t had cause to access that money yet but never expected to use the checks in a manner other than to deposit them into my local bank account.

October 22, 2011 at 1:29 pm
(14) Edward says:

My son passed away in June and my alliance account only promised .5% interest. Then after two months they notified me that it would only give a minimum of .25% interest. 3% would be outstanding, but they keep messing with it. After reading about the difficulties of using the checks, I think I will close the account and put it in the bank.

January 9, 2012 at 12:36 pm
(15) Takeanotherlook says:

It Stinks, It Stinks to High heaven.. Prudential is NOT FDIC insured so all the money above a dollar is at risk. For that risk they pay you only 1.5 %. ???

If you take 100K to any FDIC insured bank you will earn more then 1.5% on a CD. If you take 400K put 250K in a CD you may even get 2% on your money. Plus 250K is FDIC insured at the Federal Banks or Federal Credit Unions.
Please do Not keep your money with Prudential unless you like living with unrewarded Risks..

January 9, 2012 at 12:38 pm
(16) Takeanotherlook says:

It Stinks, It Stinks to High heaven.. Prudential is NOT FDIC insured so all the money above a dollar is at risk. For that risk they pay you only 1.5 %. ???

If you take 100K to any FDIC insured bank you will earn more then 1.5% on a CD. If you take 400K put 250K in a CD you may even get 2% on your money. Plus 250K is FDIC insured at the Federal Banks or Federal Credit Unions.
Please do Not keep your money with Prudential unless you like living with unrewarded Risks.. How many service members lost their lives in Iraq? 4,000 + Multiply 4,000 by 400K that is a Billion dollars..

February 12, 2012 at 12:51 pm
(17) David Seltzer says:

First off the money is guaranteed. You’re wrong. It may not be FDIC, but it is backed by the strength of Prudential. But even is Pru falls,it has respective state guaranty agencies, which ensure beneficiaries are paid even if life insurers run out of money.

Prudential has it set up that you will always earn more than the bank. True the minimum guarantee now is lower than it was 5 years ago, but that is how every investment is now. Prudential is a strong company that has spent thousands of man hours working on this program to make sure it is handled in the most honest and efficient way for the beneficiary.

And if you do not like it do not choose it! Prudential has multiple different ways someone can deal with their money when the policyholder dies. If a person fails to choose any option than it defaults to the alliance account. If you made the mistake of not choosing anything and you dislike your choice, simply withdraw all the money whenever you please and do with it as you please. No one is stopping you.

If you have any questions you can call a Pru representative and they will be happy to help you with the option that is best for you.

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