UPDATE: Cuomo Subpoenas MetLife, Prudential Over Insurance Payouts

   (Adds details, comments throughout.) 
 
   By Erik Holm and Leslie Scism 
 

NEW YORK -(Dow Jones)- New York Attorney General Andrew Cuomo subpoenaed MetLife Inc. (MET) and Prudential Financial (PRU) as part of a "major fraud investigation" into how life insurers make payouts to insurance beneficiaries.

Cuomo attacked the industry's practice of retaining the funds until the beneficiaries request the money, and paying yields equivalent to a money-market account. By keeping the cash, insurers are able to earn a higher return on the funds than they pay out in interest.

The practice is monitored and approved by state insurance regulators, who argue that it can serve as a useful option for consumers too bereft to make immediate financial decisions.

Cuomo said the practice results in "millions of secret profits" for life insurers. He announced the investigation after Bloomberg News ran a story on the practice that focused on families of deceased U.S. soldiers.

Alan Devlin, an insurance analyst with Atlantic Equities in London, called the Cuomo probe a "a gross overreaction and a purely political move."

Still, New York insurance regulators, among the most influential nationwide, are taking a closer look at how insurers explain options to consumers to determine if they make clear that beneficiaries have the right to immediately take a lump-sum payment.

"We are very concerned that consumers fully understand what their options are when they get a claim form from the company," said Matthew Gaul, deputy superintendent for life insurance for New York's insurance department. "It has to be clearly indicated that getting a lump-sum payment up front is possible."

A lump-sum option is required under New York regulations. New York aims to soon distribute guidance to the industry on best practices for informing consumers.

A MetLife spokesman declined to comment, saying the company hadn't seen the subpoena. A Prudential spokeswoman said the company intended to fully cooperate with the investigation, but declined to comment further. MetLife and Prudential are the two largest life insurance companies in the U.S. in terms of assets. Prudential handles death benefits for the U.S. military; MetLife handles non-military federal employees.

Regulators said a concern is whether consumers understand that they could earn higher rates by investing the death benefit in bank certificates of deposit or other options. Many of these alternatives, such as CDs, would require giving up immediate access to the money. Many insurers give beneficiaries checks that allow them to draw on the funds.

Regulators said the practice of offering consumers the option of taking a death benefit as a lump-sum payment or keeping it at the insurance company indefinitely has been around for decades.

Cuomo, who is running for governor, said that when insurers keep the funds, the assets "may not be safe," since they are not protected by the federal bank insurance that backs deposits up to $250,000. Devlin, the analyst, said MetLife and Prudential are financially strong and backed by state-run insurance guarantee funds.

-By Erik Holm, Dow Jones Newswires; 212-416-2892; erik.holm@dowjones.com; Leslie Scism, Wall Street Journal,; 212-416-3223; leslie.scism@wsj.com.

(John Kell contributed to this article.)

(END) Dow Jones Newswires

July 29, 2010 14:28 ET (18:28 GMT)

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