While we seem to have ever-increasing access and insight over our government, corporations, professionals and even the press, the general level of mistrust in these institutions and the individuals that support them have also arguably arisen exponentially. However, in terms of personal financial and estate planning, these widespread suspicions can be relegated to attractive, yet temporary, distractions.
My wonderful wife recently sent me an article from the Washington Post, which described a private insurance company’s controversial practices in paying out death benefits for fallen soldiers insured through a Department of Veterans Affairs program. Instead of paying out the full benefit to the soldier’s family immediately, the insurance company sent a checkbook with instructions that the family had the option to instead keep the funds with the insurance company in an interest-bearing account for as long as they liked.
However, written in fine print was the fact that the account was not insured by the Federal Deposit Insurance Corporation (hereinafter “FDIC”) as are most bank accounts. Further, the article reported that while the insurance company would pay as little as 0.5% interest per year on the amounts in the account, it would earn up to 4.8% over the same period on the funds. As a result, it is argued that the insurance company has used its contract with the Department of Veterans Affairs to greatly profit from soldiers’ deaths in combat.
The insurance company has some interesting counterpoints. First, while the funds are not FDIC-insured, this does not imply that the funds are uninsured. A related article on cnn.com discussed that the company’s accounts were in fact insured by state guaranty funds in amounts similar to those provided by the FDIC. It is also typical for insurance companies to insure their general accounts through reinsurance, where it pays another insurance company to take on some of its own risk. Finally, one might consider that banks and mutual funds have long had the same practice of paying less interest on money market accounts than they earn through their own investing, albeit through stringent governmental regulation.
So who is to blame? The insurance company, for using fine print and omissions for a profit motive? The government, for sponsoring private life insurance for members of the military? The press, for over-analyzing a system which up until now seems to have had very few complaints? The lawyers, for finding yet another loophole at the expense of innocent families?
Regardless of who is right and wrong, such scenarios raise our skepticism and our fears. Who can we trust? How can we possibly make the right choices in such an environment? In a future post, I will discuss how the estate planning process could help place one’s focus away from these difficult questions and properly back onto the specific desires of the individual involved.