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Prudential declined to answer, saying that information was proprietary, Wurtz says.

‘Maybe I Didn’t’

Prudential, which has had the insurance contract with the VA since 1965, pitched the checkbook payout to the VA in 1999 as an added benefit to survivors, Wurtz says. The government agency accepted Prudential’s offer, he says.

“Maybe I didn’t ask enough questions,” he says.

Printed on each “check,” next to “Prudential’s Alliance Account” is the name of JPMorgan, the second-biggest U.S. bank by assets. JPMorgan spokesman Murray declined to say how much the bank is paid for its role with Prudential.

The way Prudential has set up the “checks” implies that JPMorgan stands behind the accounts and that they are thus backed by the FDIC, Duke’s Baxter says.

“That’s misleading the beneficiaries,” he says.

“We disclose the roles of all companies involved in administering these accounts,” Prudential’s DeFillippo says. JPMorgan’s Murray declined to comment.

Prudential’s general account earned 4.4 percent in 2009, mostly from bond investments, according to SEC filings. The company has paid survivors 0.5 percent in 2010.

‘It’s Shameful’

“It’s shameful that an insurance company is stealing money from the families of our fallen servicemen,” says Paul Sullivan, who served in the 1991 Gulf War as an Army cavalry scout and is now executive director of Veterans for Common Sense, a nonprofit advocacy group based in Washington. “I’m outraged.”

Sullivan, a project manager at the VA’s benefits unit from 2000 to 2006, says he was never told Prudential kept money and earned investment gains from soldiers’ insurance payouts instead of sending it to survivors.

“There shouldn’t be secret profits,” he says. “This should be transparent. The lack of oversight is appalling.”

It’s not much different for the 4 million nonmilitary U.S. government employees and retirees -- including staff of the FDIC -- covered by MetLife policies. That program, begun in 1965, averages more than $2 billion in death benefits claimed every year, the government says.

Payouts are handled by the Office of Federal Employees’ Group Life Insurance. That makes it look like the government is taking care of its employees’ insurance coverage. It isn’t. That “office” is a unit of MetLife.

MetLife Holds the Money

Edmund Byrnes, a spokesman for the Office of Personnel Management, which oversees MetLife’s federal employee contract, says MetLife segregates death benefits into beneficiary accounts after it approves death claims.

“Once MetLife transfers the funds to the Total Control Account, the monies are no longer under MetLife’s control,” Byrnes says.

MetLife spokesman Madden says something different.  “The assets that back the liabilities on all the TCAs are placed in MetLife’s general account,” he says.

Back at the Veterans Affairs office, Deputy Assistant Director Wurtz, who’s a civilian employee, says he now understands for the first time that since he’s covered by the federal insurance program, his own wife could receive a MetLife “checkbook” someday.

‘Ripping Off Their Own’

“Uncle Sam is ripping off their own,” Wurtz says. “My wife would get the money, and they would blood-suck some of it out of her.”

It took Wurtz, who’s been working with insurers for most of his career, more than a decade to understand how retained-asset accounts work. Companies like MetLife and Prudential have never told millions of Americans with insurance policies that when they die, the insurer plans to hold their family’s money in its own account to make investment gains from the death benefit.

“It’s outrageous that somebody’s profiting off other people’s grief,” says Mark Umbrell of Doylestown, Pennsylvania. His 26-year-old son, Colby, an Army Airborne Ranger who earned a Bronze Star and a Purple Heart, was killed in Iraq in May 2007. Umbrell was among those who got a “checkbook” account.  “I think we’re being taken,” he says.

The question for Umbrell, Lohman and a million others with these accounts is whether anything will change. State bank regulators say if there are to be any reforms, they should be made by insurance departments. Officials at those state agencies often say they don’t even understand what a retained-asset account is.

“It’s flown under the radar,” professor Stempel says. “Regulators have not done their job.”

Until public officials wake up, the bereaved will remain a secret profit center for the life insurance industry.

Editors: Jonathan Neumann, Gail Roche

To contact the reporter on this story: David Evans in Los Angeles at davidevans@bloomberg.net