By Bloomberg News

July 28, 2010

The package arrived at Cindy Lohman’s home in Great Mills, Maryland, just two weeks after she learned that her son, Ryan, a 24-year-old Army sergeant, had been killed by a bomb in Afghanistan. It was a thick, 9-inch-by- 12-inch envelope from Prudential Financial Inc., which handles life insurance for the Department of Veterans Affairs.

Inside was a letter from Prudential about Ryan’s $400,000 policy. And there was something else, which looked like a checkbook. The letter told Lohman that the full amount of her payout would be placed in a convenient interest-bearing account, allowing her time to decide how to use the benefit.

“You can hold the money in the account for safekeeping for as long as you like,” the letter said. In tiny print, in a disclaimer that Lohman says she didn’t notice, Prudential disclosed that what it called its Alliance Account was not guaranteed by the Federal Deposit Insurance Corp., Bloomberg Markets magazine reports in its September issue.

Lohman, 52, left the money untouched for six months after her son’s August 2008 death.

“It’s like you’re paying me off because my child was killed,” she says. “It was a consolation prize that I didn’t want.”

As time went on, she says, 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.

‘I’m Shocked’

Lohman, a public health nurse who helps special-needs children, says she had always believed that her son’s life insurance funds were in a bank insured by the FDIC. That money — like $28 billion in 1 million death-benefit accounts managed by insurers — wasn’t actually sitting in a bank.

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.

“I’m shocked,” says Lohman, breaking into tears as she learns how the Alliance Account works. “It’s a betrayal. It saddens me as an American that a company would stoop so low as to make a profit on the death of a soldier. Is there anything lower than that?”

Millions of bereaved Americans have unwittingly been placed in the same position by their insurance companies. The practice of issuing what they call “checkbooks” to survivors, instead of paying them lump sums, extends well beyond the military.

For the rest of this story go to Fallen soldier’s families denied cash as insurers profit

There is one underlying reason for anyone to own life insurance: If you die before you have been able to meet your desired financial goals for your family, the insurance proceeds will create an instantaneous estate for the use of those whom you love and care about after you are gone. This doesn’t say anything about what kind of life insurance you should buy, but it says why you want to buy it. The goals for life insurance proceeds may include paying off the mortgage so your family can live in the current home, providing sufficient income so the surviving spouse can stay at home or work part time while raising the children to adulthood, paying for the dreamed of college education and generally bringing peace of mind in regard to financial needs and maintaining an adequate life style.

If you have no one who depends on you for financial support (spouse, kids, parents, etc.), then you have little reason to own life insurance. You might want to have just enough so whoever is going to have to take care of your final details will have adequate funds. There may be significant final medical expenses, not to speak of funerl arrangements, that could be problematic if you don’t have a fair estate outside of insurance.

The second major reason for owning life insurance is for business purposes. If you own a business or are a partner in a business, one contingency that should be considered is what would happen to the business of you were to die “prematurely”? What is prematurely? Sooner than you have planned for. This really works in essentially the same way as for family insurance but the direct beneficiary is the business.

• Partnerships: When one partner dies prematurely, it usually means the surviving partner either has a new partner (the surviving spouse) or he is in a position to buy out the half that belonged to his now dead partner. If the partnership is flush with cash, that may not be a problem. But if the business is like most, paying off a deceased partner’s spouse would be a real set back and could mean the end of the business.
• Corporations: This is very similar only here either the other shareholders or the corporation is buying back the shares of the deceased shareholder.
• Estates: A third reason for life insurance is to provide liquidity to pay Estate Taxes without having to liquidate the “familly farm” or whatever assets the family won’t want to have to sell in order to pay the Estate Taxes.

Each of these “reasons” for owning life insurance have different technicalities about how to properly set up beneficiary designations and ownership and a good life insurance agent should be well trained in those technicalities. In the case of business and estate planning, you should also consult with an appropriate attorney and/or accountant.

Bottom Line: The bottom line of the WHY of life insurance is it is a risk management tool to mitigate the risk of negative consequences resulting from death. The real WHY of life insurance has nothing to do with the build up of cash value inside a policy. It all has to do with the death benefit. Keep this in mind whenever talking to an insurance salesman.

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“Investor Education for Main Street America”