(CNN) -- New York Attorney General Andrew Cuomo is launching a fraud investigation into the life insurance industry for "practices that appear to have denied grieving military families and others of millions in life-insurance cash," Cuomo's office announced Thursday.
The attorney general's office says it appears some insurers tell families of fallen military personnel that policy payouts will be placed in an interest-bearing accounts. But the bulk of the interest benefits the insurers, and the cash is not placed in banks insured by the Federal Deposit Insurance Corporation (FDIC), Cuomo's office said.
"It is shocking and just plain wrong for these multi-national life insurance companies to pocket hundreds of millions in profits that really belong to those who have lost family members and have already suffered immensely," Cuomo said.
His office said insurers place cash in their corporate accounts, reportedly earning up to 4.8 percent interest while paying families as little as 0.5 percent interest.
Subpoenas have been served on Prudential Financial Inc. and MetLife Inc., though the entire life insurance industry is under investigation, according to the attorney general's office. The accounts in question include Prudential's Alliance Account and MetLife's Total Control Account.
In a written statement, Prudential Chairman and CEO John Stangfeld said, "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 Veteran Affairs, we welcome an opportunity to address the concerns and to set the record straight."
Prudential said that while the accounts in question are not FDIC insured, the accounts are protected by state guaranty funds that provide protection of at least $250,000 in most states.
"Prudential does not in any way take money from beneficiaries," the company said.
In a written statement, MetLife spokesman John Calagna said Thursday he has not seen Cuomo's subpoena and therefore had no comment on it.
"However we strongly disagree with many misleading statements in recent media reports and want to be clear regarding several important features of MetLife's Total Control Account ('TCA')," Calagna said.
He said MetLife is not the issuer of the Service Employees Group Life Insurance program provided to members of the armed forces, but the company does provide the life insurance policy for civilian federal employees under a program called FEGLI (Federal Employees Group Life Insurance).
"Our materials carefully explain the TCA to our customers so that they understand that they can use their checkbooks to withdraw all of their benefits immediately or over time as they choose," Calagna said. "They have full access to their funds and earn a guaranteed minimum interest rate that exceeds what they could earn on most money market accounts."
Cuomo's office said Prudential beneficiaries receive what appears to be a checkbook with "JPMorgan Chase & Co." on the "checks," but said the so-called checks cannot be used to make purchases and are not bank checks at all.
"Instead, Prudential must send money to JPMorgan Chase before the checks can clear," the attorney general's office said. "Prudential beneficiaries are also not informed that under a 2008 law, they have one year to place the death benefits in a Roth IRA and earn tax-free investment gains for the reset of their lives. Thus, real financial harm is suffered by Prudential's lack of disclosure."
Prudential said more than 40,000 Alliance Account drafts cleared last year, and the company receives few complaints from beneficiaries about difficulties.
Secretary of Defense Robert Gates said he learned Thursday that families of deceased military members did not get a lump-sum payment for life insurance policies.
"Until today, I actually believed that the families of our fallen heroes got a check for the full amount of their benefit," Gates said during a briefing at the Pentagon. "So this came as news to me. And so I will just say I will be very interested in the outcome of" an investigation.