One thing you should never do is — Trust an Insurance Company.

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. […]

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.

This little scam, by the way isn’t exclusive to the beneficiaries of dead soldiers. It applies to a lot of life insurance policies, and quite possibly one of the ones you pay premiums on. That money in the corporate account at your insurance company isn’t covered by the FDIC.

In fact, the Federal Government and most states don’t regulate insurance companies regarding this this deceitful, unconscionable practice. Unless the beneficiary demand his or her payout immediately, the insurance company keeps the funds, pays bupkiss in interest and reinvests that money in bonds that currently pay around 4 to 5 % interest. In short, it screws people who have just lost a father, husband, wife, son or daughter by making it look like they are being big-hearted and looking out for beneficiaries’ interests, when the truth is that they are cheating them out of money.

[MetLife’s] letter [to dead soldier’s families] omits that the money is in MetLife’s corporate investment account, isn’t in a bank and has no FDIC insurance.

“All guarantees are subject to the financial strength and claims-paying ability of MetLife,” it says.

Both MetLife, which handles insurance for nonmilitary federal employees, and 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. […]

The “checkbook” system cheats the families of those who die, says Jeffrey Stempel, an insurance law professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas, who wrote ‘Stempel on Insurance Contracts’ (Aspen Publishers, 2009).

“It’s institutionalized bad faith,” he says. “In my view, this is a scheme to defraud by inducing the policyholder’s beneficiary to let the life insurance company retain assets they’re not entitled to. It’s turning death claims into a profit center.” […]

Insurance companies — in addition to holding onto the money of survivors, paying them uncompetitive interest rates and giving them misleading guarantees — may be violating a federal bank law. A 1933 statute makes it a felony for any company to accept deposits without state or federal authorization.

This is the same industry that wants us to repeal health care reform. The industry that is fighting even as we speak to weaken potential regulations. The industry that guaranteed it wouldn’t have to compete against a “public option” run by the federal government. An industry that has done everything it could to cheat people out of every last dime they have by denying claims, rescinding coverage and raising health insurance rates by double digits whenever ot could get away with it.

So why should we be surprised that they are engaged in a scheme that might very well be criminal to cheat the beneficiaries of the life insurance policies that people paid for by diverting those funds into their general account to make more profits for the “company.” It’s who they are. It’s what they do.

In short, they are acting as unregulated banks by creating these “accounts”, and the funds they hold are not federally insured. If there was a run on the insurance companies by beneficiaries the whole house of cards could collapse.

If one insurer is unable to meet its obligations on retained-asset accounts, people could lose faith in other companies and demand immediate payment, triggering a panic, says Baxter, who has consulted with federal agencies on financial regulation. […]

“There’s more than $25 billion out there in these accounts,” [Duke Law Professor Lawrence] Baxter says. “A run could be triggered immediately by one insurance company not being able to honor its payout. The whole point of creating the FDIC was to put an end to bank runs.”

And guess what? The financial reform bill that just passed doesn’t cover these “retained asset” accounts. Insurance companies are not subject to any federal regulation under the law’s provisions. And most people don’t know the risk involved in keeping their money in an insurance company account because the insurance companies don’t tell them about that inconvenient little piece of information. MetLife, in the 217 page handbook it gives to federal employees it insures under the Federal Employees’ Group Life Insurance never once mentions that these “accounts” (which are accounts only in name) are not federally insured.:

This lack of disclosure is unconscionable, says Harvey Goldschmid, a commissioner of the U.S. Securities and Exchange Commission from 2002 to 2005.

“I can’t imagine why bank regulators haven’t been requiring a prominent ‘no FDIC insurance’ disclosure,” says Goldschmid, who’s now a law professor at Columbia University in New York. “This system works very badly for the bereaved. It takes unfair advantage of people at their time of weakness.”

I’ll tell you why. Bank regulators regulate banks. They don’t have knowledge about the Insurance business, nor do they have a mandate to police the Insurance industry, and I’m darn sure they don’t have the personnel on hand to start policing this “quasi-banking” system off which the Insurance companies are making a tidy profit. They have enough work just trying to keep up with the banks that are specifically covered by banking regulations.

By the way, how much profit are we talking about? Well let’s ask an informed source: the man who invented this scam back when Ronald Reagan was president.

Gerry Goldsholle, the man who invented retained-asset accounts, says MetLife makes $100 million to $300 million a year from investment returns on the death benefits it holds. A former president of MetLife Marketing Corp., Goldsholle, 69, devised the accounts in 1984. He’s now a lawyer in private practice in Sausalito, California. […]

Goldsholle says he pondered the billions of dollars of death-benefit proceeds the company paid out each year.

“I looked at this and said this is crazy,” says Goldsholle, who left the firm in 1991. “What are we doing to retain some of this money? It’s very expensive to bring money in the front door of an insurance company. You’re paying very large commissions and sales expenses.”

So he came up with a way for MetLife to hold onto death benefits.

“The company would win because we would make a nice spread on the money,” Goldsholle says, while customers would earn interest on their accounts. MetLife, he says, can earn 1 to 3 percentage points more from its investment income — mostly from bonds — than it pays out to survivors.

That’s one company making $100 to $300 MILLION a year. Think how many other companies who do the same thing are likely “earning” from this little scheme, and my guess is we’re talking BILLIONS of dollars. Billions that should be going to their customers. Oh wait, I forgot. The only customers whose interests insurance companies recognize are their shareholders and senior management.

So just remember that the next time you hear your insurance agent say you can trust the company they represent to take care of your interests. Because one thing you should never do is trust an insurance company to do the right thing on your behalf.