Prudential Insurance Company of America has been named in a lawsuit which claims the company was collecting 5.69% interest on veterans’ life insurance policies and paying out only 1% to actual beneficiaries. The lawsuit was filed earlier today in a US District Court in Massachusetts.

The lawsuit is seeking class action status and was brought on by the parents of a man in the US military who died in 2004. The parents are the beneficiaries of their son’s $250.000 life insurance policy. The US Department of Veteran Affairs stated they were investigating the practices of insurance companies that put the death benefits of veterans into corporate accounts. The insurance company keeps most of the investment profits and only pays out a small portion to the surviving beneficiaries.

Reports from the Department of Veterans Affairs show the Prudential Insurance collected $982.8 million as the administrator of veterans’ policies in 2009, $144.1 million in income from investments, and held more than $2.5 billion in reserves. Lawyers representing the plaintiffs in the case state that the money accrued from interest is not money that belongs to Prudential.

Prudential has reportedly been talking with the Department of Veterans Affairs about the allegations. The Chairman and CEO of the company, John Strangfeld, stated ‘It is important that the beneficiaries of our fallen service men and women are treated with dignity and respect during a very difficult time. Given the questions raised over the life insurance program we administer for the Department of Veterans Affairs, we welcome an opportunity to address the concerns and to set the record straight.”

New York’s Attorney General Andrew Cuomo has also launched an investigation into fraudulent practices of other companies involved in the life insurance industry involving the denial of life insurance benefits to grieving family of military members. In Cuomo’s investigation, not only did insurance companies profit from the interest accrued, it was found that initial monies were not deposited with banks insured by the FDIC.