	Costly Financial Products With Features Inappropriate for Military Members Raise Sales Practice Concerns

A limited number of insurance companies and broker-dealers are under  investigation for deceptive sales practices to target military members with  financial products that have features that reduce their benefit to service  members. Although most service members already receive considerable  low-cost life insurance as part of their government benefits, state  insurance regulators we contacted said that at least six insurance  companies have been selling a hybrid insurance product that combines life  insurance coverage with a side savings fund to thousands of service  members at installations across the United States and around the world. These products provide additional death benefits but are significantly  more expensive than other life insurance coverage available to service  members. However, the products being  marketed by these insurance companies require a long series of payments  to result in significant benefits to their purchasers. This occurs because of the large premiums  due in the early years on this type of policy, and because the accumulated  value of the savings fund for this product was modest. In the report we prepared for this committee, we  identified at least 17 lawsuits or administrative actions that had been taken  against companies that market primarily to military members. Regulators and other organizations are also examining whether the sellers  of these products are misrepresenting information on the forms used to  initiate pay allotments to deduct the payments for the products directly  from the service members’ pay. In addition, insurance regulators in some states are currently reviewing  whether these combined insurance and savings products that are being  sold to military members comply with all applicable state insurance laws  and regulations. Companies also Selling Service Members a Mutual Fund Product with Features that Reduce Its Benefit to Most Military Members

Large numbers of service members, including officers, were also  purchasing a unique securities product, known as a contractual plan, with  features that reduce its benefit to military members. However, if a purchaser of one of these plans stops making  regular investments earlier, the effective sales charge can be much higher. Firms marketing contractual plans have again been  accused of inappropriate sales practices. In December 2004, SEC and  NASD sanctioned the largest broker-dealer marketing these plans to  service members after alleging that the firm’s marketing materials were  misleading. Lack of DOD Complaint Sharing Hampered Regulators’ Ability to Identify Problems Involving Sales to Military Members

Additional actions by Congress, DOD, and regulators also appear  warranted to improve the effectiveness of insurance and securities  regulators in overseeing sales of financial products to military members. In addition to conducting routine examinations,  insurance and securities regulators use complaints from financial firms’  customers as an indicator that problems involving particular products, or  the practices of particular firms, exist. The 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. In our June 2005 report, we recommended that  DOD create a database of all violations of its solicitation policy. DOD has not, as of yet, issued this new directive. This DOD official also acknowledged that  more coordination could be done to ensure that both military installation  personnel and financial regulatory staff understand how additional sharing  could appropriately occur  To ensure that financial regulators have critical information that they need  to identify problematic products and sales practices, the report we  prepared for this committee recommends that Congress direct DOD to  develop mechanisms to overcome any barriers and coordinate with its  installation personnel and with financial regulators on ways to share  additional information about problematic financial firm practices and  service member concerns. Appendix I: Additional Actions Needed to Improve Oversight of Pay Allotments for Insurance for Military Members

As a result of a report we issued in June 2005, the Department of Defense  (DOD) has agreed with our recommendations to improve aspects of its  oversight of insurance purchases by military members.
Why GAO Did This Study

In 2004, a series of media articles alleged that financial firms were marketing expensive and potentially unnecessary insurance or other financial products to members of the military. GAO's report for this committee examined (1) features and marketing of certain insurance and securities products being sold to military members and (2) how financial regulators and the Department of Defense (DOD) were overseeing the sales of insurance and securities products to military members. GAO also examined issues relating to DOD's oversight of insurance sales for a report issued in June 2005.

What GAO Found

A limited number of firms accused of using deceptive sales practices are targeting costly financial products to military members with features that reduce their benefits to military purchasers. Although some service members benefited from a product that combines insurance with a savings component, the additional coverage was more expensive than the low-cost government insurance almost all service members already receive. One feature reducing these products' benefits was that if the service member ever stopped making payments and did not request a refund, the accumulated savings is used to continue the life insurance coverage. With military members often leaving the service within a few years, most stopped their payments and likely failed to amass any savings from their purchase. Various regulatory and other actions have been taken against the insurance companies that sell these products in the past and new investigations are underway in 14 states over whether these companies have failed to clearly identify the products as insurance as required by law or whether the products' features comply with all state insurance requirements. A small number of broker-dealers were also marketing a securities product--the mutual fund contractual plan--that has largely disappeared from the civilian marketplace. Although potentially providing returns equivalent to other products if steady payments are made over a long period, these contractual plans proved more expensive to most military purchasers than other widely available alternative products because many military members stopped making payments in the first few years. In addition, the largest broker-dealer selling contractual plans has already been sanctioned by regulators for using misleading marketing materials and examinations into the practices of other firms marketing this product are also underway. A lack of routine complaint sharing by DOD prevented financial regulators from identifying inappropriate sales to military service members earlier. Although insurance regulators in some states review sales activities periodically, most rely on complaints to indicate that potentially problematic sales are occurring, particularly since no appropriateness or suitability standards exist for insurance. Securities regulators' efforts were also hampered by the lack of complaint sharing from DOD personnel. Because sharing with financial regulators can be complicated by privacy regulations and potential legal restrictions, DOD personnel at individual installations generally resolved matters involving product sales with companies directly. However, in light of the problems identified in our June 2005 report and the report issued for this committee, DOD has efforts underway to revise its solicitation policies regarding such sales, and has reviewed ways in which it can legally share additional information with financial regulators. However, DOD has not yet issued these new policies or coordinated with military installation personnel or with regulators on appropriate ways that additional sharing could occur.