In addition, 2 million retirees receive pay and benefits from the  department. In terms of income, this report found that 87 percent of junior  enlisted personnel had total monthly family incomes of $3,000 or less. Although they combine insurance with a savings  component promising high returns, many military personnel did not benefit  because any savings accumulated on these products can be used to extend  the insurance coverage if service members ever stop making payments and  fail to request a refund of their savings. A number of financial regulators  are also investigating the claims that these companies have been using  inappropriate sales practices when soliciting military members, including  examining allegations that agents have been inappropriately marketing the  insurance products as “investments.” Some of these companies have also  been subject to past disciplinary actions by insurance regulators and for  violations of DOD regulations governing commercial solicitation on  military installations. We also found  evidence that large numbers of these products were being sold. Under the basic terms of these products, most of the service  members’ first year’s payments would be applied to the life insurance  premium and the remainder allocated to the savings fund. Many military members that purchased these products only made their  payments for a short period of time. A Unique Securities Product with High Sales Charges Sold to Military Members Has Also Raised Sales Practice Concerns

A few broker-dealers have marketed a unique securities product, often  referred to as a contractual plan, to military service members that has  proven to be more costly than other commonly available products. Contractual Payment Plans Feature High Up-Front Sales Charges that Are Not Typical of Other Securities Products Available

Under the terms of the contractual plans being sold to military service  members, the purchaser enters into a contract to make periodic  investments for a set term (such as 10 to 15 years). Even with such limitations, sales charges  associated with contractual plans can still be much higher than those of  other mutual fund products and industry norms. However, regulators  found that it was being sold as an integral part of the entire product, not as  an optional feature to a life insurance policy. In addition, regulators in  Virginia have also ordered that some companies that target military  members to cease selling certain products in their state However,  regulators in the other states that are currently conducting investigations of  the companies targeting military members were not generally aware of  such sales until recent press reports because DOD personnel were not  generally sharing information about any service member complaints or  concerns they received. Securities regulators’ ability to detect problems was also hampered by the  lack of standardized data on the extent to which customers were  completing contractual plans. Given that military members  move frequently and often leave the service within a few years, many did  not continue their payments and failed to request refunds, and as a result,  few likely amassed any savings from their purchase. In addition,  having insurance regulators and DOD work cooperatively to develop  suitability or appropriateness standards could ensure that companies offer  only products that address actual service member needs for insurance and  that take into account service members’ itinerant lifestyles, income levels,  and likely inability to make payments for extended periods of time. Recommendations

To better protect service members from unscrupulous sales of financial  products, the Secretary of Defense should take the following two actions:  Issue a revised DOD solicitation policy requiring that information on  service member complaints related to financial product sales be  provided to relevant state and federal financial regulators. We also interviewed officials from  the largest broker-dealer firm that markets to military members, which  represents 90 percent of the military market segment, and two of the  investment management firms that manage mutual funds underlying the  contractual plans sold to service members. To assess how financial regulators and DOD were overseeing financial  product sales to military members, we interviewed state insurance and  federal, state, and other securities regulators.
Why GAO Did This Study

In 2004, a series of press articles alleged that financial firms were marketing expensive and potentially unnecessary insurance or other financial products to members of the military. To assess whether military service members were adequately protected from inappropriate product sales, GAO examined (1) features and marketing of certain insurance products being sold to military members, (2) features and marketing of certain securities products being sold to military members, and (3) how financial regulators and the Department of Defense (DOD) were overseeing the sales of insurance and securities products to military members.

What GAO Found

Thousands of junior enlisted service members have been sold a product that combines life insurance with a savings fund promising high returns. Being marketed by a small number of companies, these products can provide savings to service members that make steady payments and have provided millions in death benefits to the survivors of others. However, these products are much more costly than the $250,000 of life insurance--now $400,000--that military members already receive as part of their government benefits. In addition, the products also allow any savings accumulated on these products to be used to extend the insurance coverage if a service member ever stops making payments and fails to request a refund of the savings. With most military members leaving the service within a few years, many do not continue their payments and, as a result, few likely amassed any savings from their purchase. Several of the companies selling these products have been sanctioned by regulators in the past and new investigations are underway to assess whether these products were being properly represented as insurance and whether their terms were legal under existing state laws. Thousands of military members were also purchasing a mutual fund product that also requires an extended series of payments to provide benefit. Known as contractual plans, they expect the service member to make payments for set periods (such as 15 years), with 50 percent of the first year's payments representing a sales charge paid to the selling broker-dealer. If held for the entire period, these plans can provide lower sales charges and comparable returns as other funds. However, with securities regulators finding that only about 10 to 40 percent of the military members that purchased these products continued to make payments, many paid higher sales charges and received lower returns than had they invested in alternatively available products. Regulators have already taken action against the largest broker-dealer that marketed this product and are investigating the few remaining sellers for using inappropriate sales practices. With the wide availability of much less costly alternative products, regulators also question the need for contractual plans to continue to be sold. Financial regulators were generally unaware of the problematic sales to military members because DOD personnel rarely forwarded service member complaints to them. Insurance products also usually lacked suitability or appropriateness standards that could have prompted regulators to investigate sales to military members sooner. Securities regulators' examinations of contractual plan sales were also hampered by lack of standardized data showing whether customers were benefiting from their purchases. Although recognizing a greater need for sharing information on violations of its solicitation policies and service member complaints, DOD has not revised its policies to require that such information be provided to financial regulators nor has it coordinated with these regulators and its installations on appropriate ways that additional sharing can occur.