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Checkbook Accounts: Unum Gets a Reality Check

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Washington, DCIn 2008 the US First Circuit Court of Appeals ruled against Unum after three beneficiaries of an employer-sponsored plan sued the insurer when they were mailed checkbooks, arguing that their policies with Unum stated they would be paid "in one lump sum." According to the 8/6/10 edition of the Wall Street Journal Unum and plaintiffs lawyers agreed upon a proposed $5 million settlement that would apply to beneficiaries with similar language in their policies.

The appellate panel concluded that Unum's method of paying funds when the checkbooks were sent "obscures reality."

The checkbook approach has been going on for several years with a number of insurers, including Unum. Although the insurance industry has won favorable rulings from federal judges in New York, New Jersey and the US Second Circuit Court of Appeals, life insurers are expecting more lawsuits. The checkbook accounts are being investigated by multiple state authorities and lawmakers in Congress and New York Attorney General Andrew Cuomo's office opened a "major fraud investigation" after the mother of a solider killed in Afghanistan gave media interviews saying she felt misled by checkbook accounts.

This is how it works: Insurers set up an account and issue a book of "draft" checks, which beneficiaries can use to withdraw as much or as little of the money as they want, when they want—supposedly. The mother thought the accounts had federal banking protection, when instead they were sitting in the insurer's general corporate account (in her case, Prudential) and earning investment income for the insurer. She discovered that retailers won't accept these checks.

A number of critics say insurers earn secret profits on this business, and that's a big chunk of change. According to Bloomberg on 7/28/10, that amounts to $28 billion in one million death-benefit accounts managed by insurers.

So the bereaved families are offered a "checkbook" for a secure account holding the money that will earn interest (called a "retained-asset account"). But there is no individual account for each family. The money is held in the insurer's general corporate account, which is not guaranteed by the Federal Deposit Insurance Corporation (FDIC), and earns a minute amount of interest, maybe 0.5 percent, compared to what a real bank account would earn. (The insurer earns a much higher interest rate.) The "checks" are really IOUs because the money isn't in the bank and must be sent over to a bank by the insurance company.

Because the accounts aren't insured by the FDIC, it is possible that the insurer would not be able to pay and the bereaved family would have no recourse.

Inaddition to holding onto the money of survivors, paying them uncompetitive interest rates and giving them misleading guarantees, insurance companies 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.


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