a

GAO

United States Government Accountability Office

Report to the Committee on Banking, 

Housing, and Urban Affairs, U.S. Senate

November 2005 FINANCIAL 

PRODUCT SALES

Actions Needed to 

Better Protect Military 

Members

GAO-06-23
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-06-23.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Richard Hillman 

at (202) 512-8678 or hillmanr@gao.gov. 

Highlights of GAO-06-23, a report to the 

Committee on Banking, Housing, and 

Urban Affairs, U.S. Senate 

November 2005

FINANCIAL PRODUCT SALES 

Actions Needed to Better Protect Military 

Members 

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 brokerdealer 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. 

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 Recommends

Matters that Congress should 

consider include banning 

contractual plans, requesting that 

insurance regulators conduct 

reviews to ensure that products 

being sold to military members 

meet existing insurance 

requirements, and ensuring 

development of appropriateness or 

suitability standards for such sales. 

GAO also recommends that DOD 

and financial regulators work 

cooperatively to help improve the 

oversight of such products. DOD 

and the financial regulators 

provided comments generally 

agreeing with this report and its 

recommendations. 
Page i GAO-06-23 Financial Product Sales

Contents

Letter 1

Background 2

Results in Brief 9

Sales of Costly Insurance Products to Service Members Raise Sales 

Practice Concerns 12

A Unique Securities Product with High Sales Charges Sold to 

Military Members Has Also Raised Sales Practice Concerns 30

Lack of Complaint Sharing Prevented Earlier Identification of 

Improper Sales to Military Members 38

Conclusions 55

Matters for Congressional Consideration 59

Recommendations 59

Agency Comments 60

Appendixes

Appendix I: Objectives, Scope, and Methodology 63

Appendix II: Actions Taken Against Financial Companies that Have 

Frequently Marketed to Military Members 67

Appendix III: Performance of Contractual Plans Compared to Alternative 

Investments 71

Appendix IV: Jurisdictions in Which at Least One of the Six Insurance 

Companies That Target Military Members Were Licensed to 

Sell Insurance 73

Appendix V: Comments from the Department of Defense 74

Appendix VI: Comments from the Securities and Exchange Commission 77

Appendix VII: Comments from NASD (Formerly Called the National 

Association of Securities Dealers) 78

Appendix VIII: Comments from the National Association of Insurance 

Commissioners 81

Appendix IX: GAO Contact and Staff Acknowledgments 83

Tables Table 1: Regulatory Actions or Activities Involving Companies that 

Have Frequently Marketed to Military Members 67
Contents

Page ii GAO-06-23 Financial Product Sales

Table 2: Investment Performance of a $100 Monthly Contribution 

into a Contractual Plan, Conventional Mutual Fund, and 

TSP C Fund, Assuming Each Earns a 7 Percent Return 72

Figures Figure 1: Number of Service Members by Military Pay Grade 

Groupings (as of Year-end 2004) 3

Figure 2: Sample Payment Allocations of $100 per Month for a 

Term Life Insurance Product Sold to Military Service 

Members with a 7-Year Premium Period and a Side 

Savings Fund Crediting 4 Percent 15

Figure 3: Sample Payment Allocations of $100 per Month for a 

Modified Whole Life Insurance Product Sold to Military 

Service Members with a Side Savings Fund Crediting 4 

Percent (First 20 Years Shown) 17

Figure 4: Total Approximate Future Values of Insurance Products’ 

Savings Fund and TSP with Payments Ceasing after Year 

4 21

Figure 5: Mutual Fund Sales Load as a Percentage of Investment by 

Year 33

Abbreviations

DFAS Defense Financial and Accounting Service

DOD Department of Defense

DOJ Department of Justice

IMSA Insurance Marketplace Standards Association

NAIC National Association of Insurance Commissioners 

NASAA North American Securities Administrators Association

NASD National Association of Securities Dealers

PCS Permanent Change of Station

SEC Securities Exchange Commission

TSP Thrift Savings Plan

SGLI Servicemembers’ Group Life Insurance

VGLI Veterans’ Group Life Insurance

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Page 1 GAO-06-23 Financial Product Sales

United States Government Accountability Office

Washington, D.C. 20548

A

November 2, 2005 Letr

The Honorable Richard Shelby 

Chairman

The Honorable Paul S. Sarbanes

Ranking Minority Member

Committee on Banking, Housing, and Urban Affairs

United States Senate

In 2004, a series of media reports highlighted allegations of financial firms 

marketing expensive and potentially unnecessary insurance and other 

financial products to members of the military. These accounts included 

claims of insurance companies improperly selling insurance as investment 

products and marketing them during personal finance briefings on military 

bases in violation of Department of Defense (DOD) regulations. In addition, 

these accounts raised concerns about a firm that employed retired and 

former military members to market a mutual fund product with high upfront sales charges that was rarely being offered to civilians. As a result of 

these media accounts, Congress and others have become concerned over 

whether the men and women in the armed services are as adequately 

protected from inappropriate financial product sales as their civilian 

counterparts. 

As a result of these allegations, you asked us to review the sales of financial 

products to members of the U.S. military. This report identifies (1) the 

extent to which certain insurance products were being sold to military 

members and how these products were being marketed, (2) the extent to 

which certain securities products were being sold to military members and 

how these products were being marketed, and (3) how financial regulators 

and DOD oversaw the sales of insurance and securities products to military 

members. 

To identify the extent to which certain insurance products were sold and 

how they were marketed to military members, we contacted state 

insurance regulators in several states with active investigations of 

insurance sales involving service members. During this work, we 

interviewed regulatory staff and reviewed available information and 

materials as part of these regulatory investigative activities. We also 

reviewed documents and met with Department of Justice (DOJ) staff 

involved in investigating sales by insurance companies to military 

members. Additionally, we interviewed officials from six insurance 

companies that market to service members and reviewed their marketing 
Page 2 GAO-06-23 Financial Product Sales

materials. We also interviewed military personnel at two large training 

bases and reviewed documents pertaining to sales and complaints at these 

locations.1

 Furthermore, we obtained data on insurance sales to military 

members from DOD’s Defense Finance and Accounting Service (DFAS), 

which maintains military personnel pay records. To identify the extent to 

which certain securities products were being sold and how these were 

being marketed to military members, we interviewed staff from federal, 

state, and other securities regulators; the largest broker-dealer firm that 

markets to military members; and two of the investment management firms 

that manage the mutual funds underlying some of the contractual plans 

sold to military 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. We also reviewed materials pertaining to investigations and 

regulatory actions involving firms marketing to military members. 

Additionally, we contacted DOD officials, conducted fieldwork at two large 

military training installations, and reviewed findings from other recent 

work concerning supplemental life insurance sales conducted at several 

other military installations throughout the country. We conducted this work 

between November 2004 and October 2005 in accordance with generally 

accepted government auditing standards. (Additional information on our 

methodology is included in appendix I.) 

Background Members of the U.S. military serve in different branches in locations across 

the country and around the world. The various branches within DOD 

include the Department of the Air Force, the Department of the Army, and 

Department of the Navy, which also incorporates forces of the Marine 

Corps. DOD also oversees the members of the Coast Guard along with the 

Department of Transportation. As of 2004, approximately 1.4 million active 

duty military personnel served in the various branches in more than 6,000 

locations. In addition, 2 million retirees receive pay and benefits from the 

department. DOD is also the largest employer and trainer of young adults in 

the United States, recruiting about 200,000 individuals into active duty in 

2004—the majority of them recent high school graduates. As shown in 

1

We also obtained information, including complaints and other alleged problems, involving 

insurance product sales at six additional military installations as part of a separate review. 

See GAO, Military Personnel: DOD Needs Better Controls Over Supplemental Life 

Insurance Solicitation Policies Involving Servicemembers, GAO-05-696 (Washington, D.C.: 

June 29, 2005).
Page 3 GAO-06-23 Financial Product Sales

figure 1, the pay of typical junior enlisted staff—grades E-1 through E-3—

ranges between $1,143 and $1,641 per month. 

Figure 1: Number of Service Members by Military Pay Grade Groupings (as of Year-end 2004)

Pay grade

E-1 — E-3

E-4 — E-6

E-7 — E-9

W-1

W-2 — W-5

O-1 — O-3

O-4 — O-6

O-7 — O-10

Privates, Airmen, Seamen

Corporals, Petty Officers,

Sergeants

Sergeants First Class, Chief

Petty Officers, Master Sergeants,

First Sergeants, Sergeant Majors

Warrant Officers

Chief Warrant Officers

Lieutenants, Ensigns,

Lieutenants Junior Grade,

Captains

Majors, Lieutenant Commanders, 

Lieutenant Colonels, Commanders,

Colonels, Captains

Generals and Admirals

$1,143 - $1,641

$1,613 - $2,908

$2,220 - $5,232

$2,290 - $3,660

$2,594 - $6,121

$2,344 - $5,083

$3,554 - $8,576

$6,666 - $13,769

683,240

135,710

13,085

2,661

125,078

84,260

328,553

886

1,147,503

15,746

210,224

1,373,473

Typical ranks Monthly basic pay range Subtotal Total

Enlisted 

servicemembers

Warrant

officers

Commissioned

officers

0 2 4 6 8 10 12 14

0 2 4 6 8 10 12 14

0 2 4 6 8 10 12 14

0 2 4 6 8 10 12 14

0 2 4 6 8 10 12 14

0 2 4 6 8 10 12 14

0 2 4 6 8 10 12 14

0 2 4 6 8 10 12 14

Number of military members

Source: GAO analysis of DOD data.
Page 4 GAO-06-23 Financial Product Sales

Entry-level military personnel are generally young and have limited 

education and incomes. A 2002 private research organization report that 

examined the financial situation of military members noted that the 

military hires primarily young, untrained, entry-level employees.2

 

Comparing data from various surveys done of large numbers of civilians 

and military members, this report found that less than 5 percent of junior 

enlisted personnel held bachelor’s degrees compared to 27 percent of the 

civilians.3 In terms of income, this report found that 87 percent of junior 

enlisted personnel had total monthly family incomes of $3,000 or less. 

However, a DOD commission that reviews military compensation has 

found that military members are paid at the 70th percentile or higher of 

comparably educated civilians. In addition, military members receive 

housing and subsistence benefits, with about half living in on-base housing 

and many having access to military facilities that provide meals. 

Various aspects of the military life can increase the challenges that service 

members face in managing their finances. According to the private 

research report, factors that appeared to increase the financial distress 

among military members were the family separations resulting from 

changes in duty stations and deployments away from home. According to 

our report on military relocations, DOD reported that about one-third of all 

military members make Permanent Change of Station (PCS) moves every 

year.4

 The average length of time spent at each location can also be brief, 

with 20 percent of such relocations lasting less than 1 year and about 50 

percent lasting 2 years or less. Leaving or retiring from the service also 

represents the last major transition in a service member’s career, with data 

2

Richard Buddin and D. Phuong Do, Assessing the Personal Financial Problems of Junior 

Enlisted Personnel, RAND Corporation, 2002.

3

The report’s data on civilians were drawn from the 1996 Panel Study of Income Dynamics, 

which was a nationally representative sample of 1,465 individuals. The survey is longitudinal 

and has been conducted annually since 1968. To be comparable to the military junior 

enlisted population, the authors excluded civilians who were full-time students or over the 

age of 40. The report’s data on military members came from two surveys of military 

personnel. The first survey was a random sample of 6,200 enlisted members with 10 or less 

years of service conduct in 1997. This survey explored various dimensions of the 

reenlistment decision for junior enlisted personnel. The second survey was a 1999 random 

sample of enlisted and officer personnel in all service branches. This survey included about 

36,000 respondents but this report analyzed the 8,000 respondents who were enlisted 

personnel with 10 or less years of military service.

4

GAO, Military Personnel: Longer Time between Moves Related to Higher Satisfaction and 

Retention, GAO-01-841 (Washington, D.C.: Aug. 3, 2001).
Page 5 GAO-06-23 Financial Product Sales

indicating that most enlisted personnel leave after their initial duty 

commitment.5

As with their civilian counterparts, military service members may be 

offered various types of financial products, including life insurance. Types 

of life insurance commonly sold include term, whole, universal, and 

variable life insurance products. Many companies offer term life insurance, 

which generally provides basic death benefits for a specified time period, 

such as 10 or 20 years. At the end of this term, the insured can usually 

renew the coverage at a higher premium rate for another set term period. 

The coverage on a term policy may also end if the insured person ceases 

making the required periodic premium payments. Under a whole life policy, 

an insured person can make level premium payments, which will provide 

the specified amount of death benefits. Because the premium generally 

stays the same throughout the time that the policy is in force, premiums for 

whole life insurance are generally higher initially than for comparable 

amounts of term life coverage. Whole life insurance policies can build cash 

value, which can be borrowed upon, though this will reduce death benefits 

until the loan is repaid in full. Some whole life policies are known as 

“modified whole life insurance” in which the policyowner pays a lower than 

normal premium for a specified initial period, such as 5 years, after which 

time the premium increases to a higher amount that is payable for the life 

of the policy. Universal life products may also provide permanent 

insurance—like a whole life policy—but may also offer their purchasers 

more flexibility. Under such policies, the holder can vary the amount of the 

premium to build up the cash value of the policy by increasing the amount 

of the payment, or can pay less into the policy at other times, when money 

is needed for other purposes. Similarly, under a variable life policy, a cash 

value accumulates that can be used to invest in various instruments, such 

as common stocks, bonds, or mutual fund investments. However, with a 

variable life policy, the policyholder (and not the company) assumes the 

investment risk tied to the product. If these investments perform well, the 

death benefits paid on the policy can increase; conversely, if the 

investments perform poorly, the purchaser may have to increase their 

premiums to keep the policy in force. 

5

D.R. Segal and M.W. Segal, “America’s Military Population,” Population Bulletin, vol. 59, 

no. 4 (Dec. 2004).
Page 6 GAO-06-23 Financial Product Sales

The federal government offers service members life insurance as part of 

their total benefits package. Each member is eligible for inexpensive 

coverage under Servicemembers’ Group Life Insurance (SGLI), which 

provides group term life insurance. Until September 1, 2005, service 

members were automatically covered for the maximum amount of $250,000 

of insurance on their first day of active duty status, unless they decline or 

reduce their coverage, but Congress has now increased this amount to 

$400,000.6 Service members leaving the military can also opt to continue 

coverage through the government-sponsored coverage provided to 

veterans. Although many life insurance policies exclude coverage for 

deaths resulting from acts of war, these government-sponsored policies do 

not contain this exclusion. 

State government entities are the primary regulators of insurance 

companies and agents in the United States.7

 When first establishing 

operations, an insurance company must obtain a charter or license in order 

to write business in a state. This state becomes its state of domicile. 

Insurers may obtain approval to market products in multiple states, and 

therefore the sales by insurers can be overseen by multiple state regulators, 

though financial solvency of each company is primarily overseen by the 

regulator in the company’s state of domicile. Some insurance companies 

market their products using their own proprietary sales force. Some 

companies may also use agents employed by independent firms who may 

be marketing the products of multiple companies to their customers. The 

state insurance regulators oversee the insurance companies and agents 

that do business in their jurisdictions in several ways, including reviewing 

and approving products for sale and examining the operations of 

companies to ensure their financial soundness or proper market conduct 

behavior. 

6

The increase in coverage and various death payments was included in the Emergency 

Supplemental Appropriations Act for Defense, the Global War on Terror, and Tsunami 

Relief, for the Fiscal Year Ending September 30, 2005, Pub. L. No. 109-13, sec. 1012 (May 11, 

2005). This bill also increased the death gratuity paid upon a service member’s death from 

$12,000 to $100,000 under certain circumstances. Some of the increases were made 

retroactively to October 1, 2001.

7

Although insurance is generally exclusively regulated by state entities, some products 

offered by insurance companies are overseen by other regulators. For example, variable life 

insurance may be considered an investment vehicle due to the ability of the policy owner to 

direct the cash values or accumulation funds into various investment instruments. Unlike 

the other life insurance products, the variable life insurance product may have a dual 

regulatory enforcement; the life insurance portion regulated by the insurance regulator and 

the investment portion (cash value) regulated by securities regulators. 
Page 7 GAO-06-23 Financial Product Sales

Although each state has its own insurance regulator and laws, the National 

Association of Insurance Commissioners (NAIC) provides a national forum 

for addressing and resolving major insurance issues and for allowing 

regulators to develop consistent policies on the regulation of insurance 

when consistency is deemed appropriate. This association consists of the 

heads of each state insurance department, the District of Columbia, and 

four U.S. territories. It serves as a clearinghouse for exchanging 

information and provides a structure for interstate cooperation for 

examinations of multistate insurers. NAIC staff also coordinate the 

development of model insurance laws and regulations for consideration by 

states. Its staff also review state insurance departments’ regulatory 

activities as part of its national financial accreditation program.

To meet their financial investment needs, military members may also be 

offered various securities products. These can include stocks issued by 

public companies that are traded in various markets, or debt securities, 

such as bonds that provide interest income to their holders. A common 

securities product that many investors purchase is a mutual fund. Mutual 

funds are investment companies that pool the money of many investors, 

and then invest them in other assets, such as stocks or bonds. By holding 

the shares of the mutual fund, investors can benefit from owning a broad 

portfolio of diversified securities managed by professional money 

managers, whose services they might otherwise be unable to obtain or 

afford. Investors are charged mutual fund fees, which cover the day-to-day 

costs of running a fund. Mutual funds are sold through a variety of 

distribution channels. For instance, investors can buy them directly by 

telephone or mail, or they can be sold by sales forces, such as the account 

representatives of third party broker-dealers. Some mutual funds assess 

sales charges (also called “loads”), which are generally paid at the time of 

purchase to compensate these sales personnel.8

 

Securities—and the firms that market them—are overseen by various 

regulators. At the federal level, the Securities and Exchange Commission 

(SEC) oversees securities issued by public companies. The firms that 

market securities to investors, known as broker-dealers, must also register 

and subject themselves to SEC oversight. This includes complying with 

8

Loads that mutual funds impose at the time of purchase (other than through reinvestment 

of dividends or capital gains) are called “frontend loads.” Some funds also offer classes of 

shares that impose contingent “deferred sales loads”, which an investor may pay at the time 

the shares are sold. Such deferred sales loads decline and eventually disappear depending 

on how long an investor holds the shares. 
Page 8 GAO-06-23 Financial Product Sales

various requirements for regulatory reporting, financial soundness, and 

sales practice regulations designed to protect investors. In addition to 

oversight by SEC, broker-dealers also are overseen by private entities 

known as self-regulatory organizations. The New York Stock Exchange and 

NASD (formerly called the National Association of Securities Dealers) are 

two examples of such organizations. State regulators also oversee 

securities activities. 

Congressional concerns over the adequacy of military member’s financial 

literacy and the processes in place to address financial product sales have 

prompted recent reviews and legislative actions. In response to a 

Congressional committee’s request to review military members’ financial 

condition, we recently reviewed and reported on the financial condition of 

active duty service members and their families. We also reported on DOD’s 

efforts to evaluate programs to assist deployed and non-deployed service 

members in managing their personal finances and the extent to which 

junior enlisted members received required personal financial management 

training.9

 As part of this study, we found that the financial conditions of 

deployed and non-deployed service members and their families are similar, 

but deployed service members and their families may face additional 

financial problems related to pay. We also found that DOD lacks an 

oversight framework for evaluating the effectiveness of its personal 

financial management training programs across services, and that some 

junior enlisted service members were not receiving personal financial 

management training required by service regulations. In addition, we 

reviewed and reported on the extent of violations of DOD’s policies 

governing the solicitation of supplemental life insurance to active duty 

service members and DOD personnel’s compliance with procedures for 

establishing payroll deductions (commonly referred to as allotments) for 

supplemental life insurance purchases.10 The findings of this review are 

discussed later in this report. 

In response to concerns over the sale of questionable financial products to 

military members, the House of Representatives passed legislation in 2004 

and 2005 requiring additional protections for service members.11 In 

9

GAO, Military Personnel: More DOD Actions Needed to Address Servicemembers’ 

Personal Financial Management Issues, GAO-05-348 (Washington, D.C.: Apr. 26, 2005).

10GAO-05-696.

11Military Personnel Financial Services Protection Act, H.R. 458, 109th Congress (2005).
Page 9 GAO-06-23 Financial Product Sales

February 2005, a similar bill was introduced in the U.S. Senate.12 Both bills 

contain various congressional findings, including the finding that military 

members are being offered high-cost securities and life insurance products 

by some financial services companies engaging in abusive and misleading 

sales practices. According to the bills, Congress finds that the regulation of 

these products and their sale on military bases has been clearly inadequate 

and requires congressional legislation to address these issues. These bills 

have been referred to the Senate Committee on Banking, Housing, and 

Urban Affairs for further consideration. 

Results in Brief State regulators in various states have found that a small number of 

insurance companies have been marketing a type of high-cost insurance 

product to thousands of low-ranking service members at military 

installations across the United States and around the world. According to 

state insurance regulators, at least six companies were targeting military 

members and selling a product that combines life insurance with a savings 

or investment fund that promises high returns but includes provisions that 

reduce the likelihood that military purchasers will benefit. Although 

military members already receive considerable low-cost life insurance as 

part of their government benefits, these companies’ products usually 

provide small amounts of additional death benefits and survivors of some 

service members that died have received millions in death benefit 

payments from these companies. However, the products sold by these 

companies had much higher premiums than those that military members 

pay on policies offered by the government or other companies. In addition, 

these products raise concerns because they have a provision that depletes 

any accumulated savings to pay the insurance premiums if the military 

members, many of whom move frequently and leave the service within the 

first few years, ever stop making the scheduled payments. With state 

insurance regulators indicating that most military members halt their 

payments within the first few years and often fail to request refunds of their 

savings, most purchasers were left with little or no savings in exchange for 

a small amount of expensive insurance coverage. Insurance regulators and 

others have already taken actions to seek remediation on behalf of service 

members from several companies selling these products and additional 

investigations are underway in as many as 14 states. Regulators are 

examining allegations of whether representatives of these companies 

12Military Personnel Financial Services Protection Act, S. 418, 109th Congress (2005).
Page 10 GAO-06-23 Financial Product Sales

misrepresented the products as investments rather than insurance, 

including investigating cases in which premiums for the products were 

alleged to have been fraudulently identified as going into savings accounts 

on forms used to deduct premium payments from the military members’ 

pay. Information from our work, DOD, DOJ, and other organizations have 

documented that these companies have frequently been found to have 

violated DOD restrictions on selling products on military installations for 

years. During the course of our work, we also referred several potential 

fraud-related concerns to our special investigators, who have initiated 

contacts with federal law enforcement authorities, state insurance 

regulators, and DOD criminal investigative organizations.

Financial regulators have also found that a securities product known as a 

“mutual fund contractual plan” was also being widely marketed to military 

members.13 Although rarely marketed to civilians since less expensive 

products have become widely available, securities regulators found that a 

small number of broker-dealers have been selling contractual plans that 

expect the purchaser to invest a set amount for a set period, such as 15 

years. Although 50 percent of the contractual plan’s first-year payments 

represent a sales charge paid to the selling broker-dealer, its total sales 

charges are generally less than for other load funds if held for the entire 

period. However, securities regulators found that only between 10 to 43 

percent of the military members that purchased contractual plan funds 

completed their plans, and as a result, the majority of service members 

purchasing this product paid higher sales charges and likely received lower 

returns than had they invested in other available products. In addition to 

being less beneficial for those that stop making payments before 

completing the full term, regulators have also found that firms marketing 

contractual plans were using inappropriate sales practices. In a settlement 

reached with securities regulators in late 2004, the largest marketer of 

these contractual plans, a broker-dealer with nearly 300,000 clients, was 

censured for, among other things, using market materials that 

misrepresented the advantages of these plans compared to other 

13Contractual plans are legal investments referred to and regulated as "periodic payment 

plans" under Section 27 of the Investment Company Act of 1940. These plans allow investors 

to accumulate shares of a specified mutual fund indirectly by contributing a fixed amount of 

money on a regular basis for a specified period usually ranging between 10 and 20 years. An 

investor in a contractual plan does not directly own shares of a mutual fund. Instead, he or 

she owns an interest in the plan trust. The plan trust invests the investor's regular payments, 

after deducting applicable fees, in shares of a mutual fund. An investor in a plan has a 

beneficial ownership interest in those shares. For purposes of this report we refer to these 

plans as “contractual plans.”
Page 11 GAO-06-23 Financial Product Sales

investments. Investigations at other firms are continuing. Because these 

contractual plans have been periodically involved in sales scandals for 

decades, regulators questioned whether they should continue to be allowed 

to be sold, particularly since the innovations of the last 20 years have 

resulted in wide availability of lower-cost alternatives, such as no-load 

mutual funds and a government-provided retirement savings plan. 

Financial regulators did not identify the problems occurring with sales to 

military members until they were brought to light by press reports for 

various reasons. Most state insurance regulators generally only conduct 

investigations of insurance company sales practices when they receive 

customer complaints. Although some state insurance regulators review 

insurance companies’ product sales practices as part of market conduct 

reviews, few insurance products are subject to any suitability or 

appropriateness standards. However, DOD personnel were rarely 

forwarding service member concerns or complaints about potentially 

inappropriate insurance sales. As a result, insurance regulators in some 

states were not made aware of problems involving sales to military 

members. Although sales of securities products are covered by suitability 

standards, securities regulators also rely on receiving complaints to initiate 

actions and were, therefore, not generally aware of problems involving 

military members and contractual plans until press reports appeared. In 

addition, prior securities regulatory examinations of the broker-dealers 

selling these products did not reveal problems because firms lacked 

standardized data on the extent to which their customers were successfully 

completing their contractual plans. Some state insurance and securities 

regulators also expressed concerns about whether they had clear 

jurisdiction over sales of financial products taking place on military 

installations. DOD is also attempting to improve its oversight of financial 

product sales on its installations, and has indicated that it plans to share 

additional information with financial regulators. However, it has not yet 

revised its policy relating to financial product sales to require its personnel 

to share information about service member concerns or complaints, or on 

violations of DOD policies by sellers of financial products. DOD was also 

reviewing various perceived barriers to sharing information, such as 

military privacy regulations, with external organizations, but has also not 

coordinated on procedures for overcoming these barriers with its 

installations or with financial regulators. 

This report presents various matters for congressional consideration and 

includes recommendations to DOD and financial regulators. Given that 

service members already receive considerable low-cost insurance, 
Page 12 GAO-06-23 Financial Product Sales

Congress should consider directing DOD and requesting insurance 

regulators to develop standards applicable to the sale of insurance 

products to military members, and require that DOD take steps to improve 

its sharing of information with financial regulators. Given the availability of 

less expensive alternative products, Congress should also consider banning 

contractual plans. This report also includes recommendations to insurance 

and securities regulators to proactively seek information about sales to 

military members, and take other actions to improve the oversight of such 

products. We obtained comments on a draft of this report from DOD, NAIC, 

NASD, and SEC. Each of these organizations provided written comments 

expressing general agreement with our report and its recommendations 

(these comments appear in appendixes V through VIII). 

Sales of Costly 

Insurance Products to 

Service Members Raise 

Sales Practice 

Concerns

A limited number of insurance companies that appear to target junior 

enlisted military members nationwide and around the world have sold 

certain costly, problematic insurance products, sometimes using 

inappropriate sales practices. These insurance products combine life 

insurance coverage with a side savings fund. The insurance products 

typically provide small amounts of death benefits and are considerably 

more costly than coverage offered to service members by the government 

or other private firms. 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.

Small Number of Firms Are 

Targeting Junior Military 

Personnel with Expensive 

Insurance Products with 

Adverse Provisions 

According to state insurance regulators we contacted, at least six 

insurance companies were marketing products combining insurance and 

savings funds with provisions that reduce the likelihood that military 

purchasers would accumulate any lasting savings with such products. 

These state insurance regulators are currently reviewing the operations of 

these companies. Several of these companies share common ownership, 
Page 13 GAO-06-23 Financial Product Sales

with three owned by the same firm and two others having key executives 

from the same family. These companies operate extensively throughout the 

United States, with four licensed to sell insurance in at least 40 states, and 

the other two licensed in at least 35 states. In addition, as of July 2005, DOD 

approved five of these companies to conduct business at U.S. military 

installations overseas.14 

These insurance companies also appeared to market primarily to junior 

enlisted service members. According to state insurance regulators we 

contacted, the companies primarily sold insurance policies to military 

personnel during their first few years of service, including during their 

initial basic training or advanced training provided after basic training. 

Although the exact number of service members that have purchased these 

products is not known, regulators told us that these companies sell 

thousands of policies to military personnel each year. We also found 

evidence that large numbers of these products were being sold. For 

example, base personnel at one naval training facility we visited said they 

regularly received several hundred allotment forms each month to initiate 

automatic premium payment deductions from military members’ 

paychecks for these insurance products.

Products Couple High-Cost 

Insurance with a Savings 

Component Promising High 

Rates of Return

The insurance companies that target military service members are 

primarily marketing a hybrid product that combines a high-cost insurance 

policy with a savings component. According to insurance regulators we 

contacted, and company marketing materials that we examined, the 

insurance component generally consists of either a term or modified whole 

life policy that would provide death benefits generally ranging from $25,000 

to $50,000 for premiums of approximately $100 per month in the first year 

with different variations in the premium amounts for subsequent years, 

depending on the product. In addition to the insurance component, part of 

the total monthly payment is allocated to a savings fund. Based on our 

review of these products, most (or all) of the service member’s payments in 

the first year are applied to the insurance component of the product. In 

subsequent years, more money is allocated to the savings fund to varying 

degrees, depending on the specific product. 

14Companies interested in selling insurance products on military installations overseas are 

required to apply to DOD each year for permission through its Overseas Life Insurance 

Accreditation Program. In order to gain authorization to conduct business in overseas 

installations, companies are to demonstrate continuous successful operation in the life 

insurance business for at least five years and must be assigned an acceptable rating from a 

private organization that assesses insurance company financial soundness.
Page 14 GAO-06-23 Financial Product Sales

The companies marketing these products advertised that they paid 

relatively high rates of return on these savings funds. At the time we 

conducted our work, all of the companies were promising to pay 6.5 

percent interest, or higher, on the savings fund portions of their products 

with a minimum of no less than 4 percent interest guaranteed. In contrast, 

as of August 30, 2005, the average national interest rate paid for a money 

market account was 2.16 percent.15 Company officials also told us that in 

the past they had paid much higher interest rates. For example, one 

company’s marketing materials for their product stated that over the past 

25 years they had paid an average rate of 11.4 percent on the savings fund. 

Further, another company’s marketing material stated that their saving 

fund interest rate for the past 10 years averaged over 10 percent. 

The six companies that were marketing primarily to military members were 

selling two primary variations of these combined insurance and saving 

products. Three of the companies sold a product that provided 20 years of 

term life insurance. However, the premium payments for this product were 

structured so that purchasers would pay for the entire 20 years of life 

insurance coverage within the first 7 years. As a result, most of the service 

member’s monthly payment for the first 7 years was allocated to the life 

insurance premium, not the savings fund. After the seventh year, all 

subsequent payments are to be deposited into the savings fund. In addition, 

this product also promised the full return of the total premiums paid for the 

insurance at the end of the 20th year, although state insurance regulators 

told us they were not aware of any policies that had reached this 20-year 

point and received this refund. Figure 2 provides an example of how the 

payments would be allocated for a service member purchasing this “7-year 

premium” term insurance product, assuming a monthly payment of $100 

and a savings portion crediting the guaranteed 4 percent simple interest 

paid annually. 

15Information on current rates obtained from The New York Times Business Section. The

New York Times uses interest data provided by http://www.bankrate.com. 
Page 15 GAO-06-23 Financial Product Sales

Figure 2: Sample Payment Allocations of $100 per Month for a Term Life Insurance 

Product Sold to Military Service Members with a 7-Year Premium Period and a Side 

Savings Fund Crediting 4 Percent 

Notes:

For purposes of this illustration, we used a specific policy of a firm offering $30,000 of life insurance 

coverage to a 20-year-old male coupled with a savings fund in which the insurance portion of the 

product is prepaid in the first seven years. 

a

Aside from interest credited in the side savings fund, the increased value of the fund at the end of year 

20 includes $6,600 that the company declares will be deposited into the fund representing the return to 

the purchaser of the total insurance policy premiums paid in the first 7 years (with no additional 

interest).

Policy

year

Annual

insurance

premium

Annual

savings fund

contribution Accumulated value of savings fund

1 $1,200 $0 $0

2 900 300 306.00

3 900 300 624.24

4 900 300 955.21

5 900 300 1,299.42

6 900 300 1,657.39

7 900 300 2,029.69

8 0 1,200 3,334.88

9 0 1,200 4,692.27

10 0 1,200 6,103.96

11 0 1,200 7,572.12

12 0 1,200 9,099.01

13 0 1,200 10,686.97

14 0 1,200 12,338.45

15 0 1,200 14,055.98

16 0 1,200 15,842.22

17 0 1,200 17,699.91

18 0 1,200 19,631.91

19 0 1,200 21,641.19

20 0 1,200 30,330.83a

Source: GAO summary of sample product marketing material.
Page 16 GAO-06-23 Financial Product Sales

Three other companies marketing primarily to military members sold other 

variations of the combined insurance and savings product. Generally, these 

products combined a modified whole life insurance policy with a savings 

fund. 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. From the second 

year on, the allocation proportions reverse where most of the money is 

applied to the savings fund. Premium payments on these products could 

continue for the life of the purchaser, although the face value of the death 

benefit would be reduced to half its initial amount after a certain period or 

when the policyholder reached a certain age, depending on the product. 

Figure 3 provides an example of how the payments could be allocated for a 

service member purchasing this type of product with a $100 total monthly 

payment and 4 percent simple interest credited on the savings fund. 
Page 17 GAO-06-23 Financial Product Sales

Figure 3: Sample Payment Allocations of $100 per Month for a Modified Whole Life 

Insurance Product Sold to Military Service Members with a Side Savings Fund 

Crediting 4 Percent (First 20 Years Shown)

Note: For purposes of this illustration, we used specific policies of a modified whole life product 

offered by two companies. A policy of one company provided $25,000 of life insurance for a 28-yearold service member. The cash value associated with the insurance portion of the product was $325 in 

year 4, $1,142 in year 10, and $2,706 in year 20. A policy of another company provided $38,054 of life 

insurance coverage to a 22-year-old service member for the first 10 years, dropping in half to $19,027 

thereafter. The cash value of the insurance portion of the product was about $57 in year 5, $476 in 

year 10, and $2,055 in year 20.

These insurance products also cost significantly more than other life 

insurance coverage available to service members. Prior to September 2005, 

all service members could purchase $250,000 of term life insurance through 

SGLI for $16.25 per month. Since September 1, 2005, the total coverage has 

increased to $400,000 for $26 per month. According to the Department of 

Veterans Affairs, which administers the SGLI program, 98 percent of all 

Policy

year

Annual

insurance

premium

Annual

savings fund

contribution Accumulated value of savings fund

1 $900 $300 $306.00

2 300 900 1,236.24

3 300 900 2,203.69

4 300 900 3,209.84

5 300 900 4,256.23

6 300 900 5,344.48

7 300 900 6,476.26

8 300 900 7,653.31

9 300 900 8,877.44

10 300 900 10,150.54

11 300 900 11,474.56

12 300 900 12,851.51

13 300 900 14,283.61

14 300 900 15,772.95

15 300 900 17,321.87

16 300 900 18,932.74

17 300 900 20,608.05

18 300 900 22,350.37

19 300 900 24,162.39

20 300 900 26,046.88

Source: GAO summary of sample product marketing material.
Page 18 GAO-06-23 Financial Product Sales

service members opt to receive this coverage. After leaving the service, 

service members can convert their SGLI coverage to a Veterans’ Group Life 

Insurance (VGLI) policy which now also provides up to $400,000 of lowcost term life insurance for veterans, with rates dependent upon age. For 

example, veterans between the ages of 40 and 44 years of age can purchase 

$50,000 of life insurance for less than $10 per month. In addition to 

government-sponsored coverage, service members can also purchase 

similar coverage, including covering combat deaths, from other insurance 

companies. For example, according to officials of one company that sells 

insurance and other financial products to military personnel directly, they 

could provide a 20-year-old service member an additional $250,000 of life 

insurance to supplement SGLI for $15 to $20 per month. 

In addition to being many times more expensive than other products 

already available to military members, companies have been selling 

insurance products to service members who generally do not appear to 

need additional life insurance, according to state regulators we contacted. 

These regulators also said the companies that targeted military members 

typically marketed their products to junior enlisted service members, who 

often have no dependents. During our review, we obtained data from the 

Defense Finance and Accounting Service (DFAS), which maintains military 

personnel pay records, indicating that most service members that appeared 

to have purchased life insurance products from some of these insurance 

companies had no dependents. For example, according to DFAS data on 

Marine Corps service members, over 6,500 pay deduction allotments to 

send premium payments to banks used by three of these insurance 

companies, starting between July 2004 and June 2005, indicated that 

approximately two-thirds were unmarried service members with no other 

dependents. Data available from other Services on allotments sent to these 

insurance companies during the same period also indicated that most of 

the service members had no dependents. Regulatory officials we contacted 

noted that the amount of coverage available to these members from SGLI 

would likely be adequate for their insurance needs, and thus no additional 

insurance coverage would be necessary.

Officials with one of the companies that targeted military members told us 

that the insurance they sell has benefited some service members. For 

example, their company has paid $37 million in death claims for service 

members in the last 5 years, including $1.5 million to survivors of service 

members killed in the recent conflict in Iraq. 
Page 19 GAO-06-23 Financial Product Sales

Certain Product Provisions 

Prevented Many Service 

Members from Receiving 

Favorable Investment Returns 

The insurance products with combined insurance and savings components 

being sold by several companies to service members had provisions that 

reduced their benefits to purchasers that could not--or did not--pay into the 

product for a long-term period. According to regulators we contacted and 

our review of selected policies, the products being sold by at least six 

companies had an automatic premium payment provision, which allows 

the companies to use money accumulated in the service member’s savings 

fund to automatically pay any unpaid insurance premiums. The provision 

extends the period of time that the service member is covered under the 

life insurance policy if the service member does not proactively contact the 

insurance company to cancel the insurance policy and request a refund of 

the savings fund. After the automatic premium payment provision is 

triggered and the savings fund becomes depleted, the policy then 

terminates, or lapses. Regulators we contacted were critical of the impact 

that this provision can have on purchasers of these products. For example, 

an official at one state regulatory agency described this provision as 

allowing the company to “parasitize” the savings fund for its own benefit. In 

contrast, representatives of one company told us that this provision allows 

the service member to receive extended life insurance coverage. 

Many military members that purchased these products only made their 

payments for a short period of time. State insurance regulators we 

contacted believed that most service members that purchased these 

products from these companies stopped making payments within the first 

few years, and that the lapse rates were significantly higher than industry 

norms. During our review, we received data on the percentage of policies 

that lapsed or terminated during the first year on products offered by four 

insurance companies that substantiated lapse rates above industry 

averages. For instance, information we obtained from one company that 

targets the military market segment indicated that approximately 40 

percent of products purchased had lapsed or terminated within the first 

year. Data provided to us from three other firms indicated that the majority 

of policies had lapsed after being held between two and three years.

The characteristics of the military population that these companies were 

marketing to increases the likelihood that service members will stop 

making payments and not receive any savings they have accumulated in 

these products. Regulatory officials we spoke with said that one of the 

reasons so many service members discontinue making payments is that 

they leave the service and thus the automatic deductions of their premium 

payments to these companies also stop. Company officials we spoke with 

told us that service members ceasing payments can request and receive 
Page 20 GAO-06-23 Financial Product Sales

refunds of the amounts accumulated in their savings accounts. However, 

according to regulators we contacted, companies do not always receive 

such requests from service members at the time payments cease. 

According to these regulators, many service members may not have 

received refunds of any accumulated savings given that such funds are 

automatically depleted to pay for the insurance policy for an extended 

period until such amounts were exhausted. As a result, many of the service 

members who simply stop paying into the product likely did not receive 

any of the money they had paid into the savings portion of the product. As 

such, they obtained some extended life insurance coverage after their 

payments ceased that, as shown previously, was more expensive than 

insurance they already receive and that they would not likely have 

purchased except for the promised savings provision. 

According to our analysis, the amount of time that it takes for a service 

member’s savings fund on the products these six companies were selling 

with a monthly payment of $100 to become totally depleted through the 

automatic payment provision varied. Figure 4 shows the impact on a 

service member that purchases the 20-year term life product with the 7-

year premium period with $30,000 of insurance coverage, makes $100 

monthly payments for 4 years totaling $4,800, and then stops making 

payments. As the figure shows, the money in this service member’s savings 

fund would be totally depleted to pay the subsequent insurance premiums 

in just over 1 year. This occurs because the policy requires that the entire 

20 years of coverage be paid for in the first 7 years, which results in the 

monthly premium being larger than comparable policies. In addition, 

because almost all of the service member’s payments during the first few 

years are allocated to the insurance policy, the accumulated value of the 

savings fund is modest. For the modified whole life product previously 

discussed, which required lower premium payments and larger savings 

accumulation after the first year, the savings fund of service members that 

ceased making their payments after 4 years would be sufficient to extend 

the $30,000 of life insurance coverage for another 13 years. In contrast, a 

service member could have used the $100 monthly payment to instead 

purchase $30,000 of SGLI term coverage at a cost of only about $23 per 

year—totaling $92 for 4 years—and invest the remaining $4,708 into the 

Thrift Savings Plan (TSP), which is the low-cost retirement savings plan 

available to military members and federal employees. Although ceasing 

payments on SGLI after 4 years would terminate the service member’s 
Page 21 GAO-06-23 Financial Product Sales

life insurance, the money contributed to the TSP and left to earn just 4 

percent interest would grow to about $9,545 in 20 years.16

Figure 4: Total Approximate Future Values of Insurance Products’ Savings Fund and 

TSP with Payments Ceasing after Year 4 

16While in the service, a service member can purchase SGLI and contribute to the TSP. If a 

service member leaves, he or she may elect to purchase VGLI and can either leave any 

accumulated savings in TSP, withdraw the money from TSP, or roll over the TSP balance 

into a similar savings instrument, such as an individual retirement account. In addition, we 

used the low risk TSP G Fund for this calculation because it invests in interest bearing 

securities and thus was comparable to the interest earning products offered by these 

insurance companies.

Dollars (in thousands)

0

2

4

6

8

10

Source: GAO analysis.

Term-life product

Whole-life product

SGLI with TSP

Policy year

Payments

cease

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Page 22 GAO-06-23 Financial Product Sales

In addition to the high costs associated with the insurance portion of these 

combination products, other provisions diminished the value of the savings 

component as well. According to regulators we contacted, withdrawal 

penalties and unique methods of interest crediting significantly reduced the 

advertised rate of return for these products. Typically, service members 

withdrawing all or part of the accumulated money in the savings fund any 

time after purchase within the first 10 years would be assessed early 

withdrawal penalties. For example, one of the companies assessed an early 

withdrawal fee of 10 percent in the first year, with this fee declining by 1 

percent each subsequent year until reaching zero in the 10th year. Several 

companies credit the amount accumulated on the basis of either the yearend balance or the average balance--whichever is less.17 For sufficiently 

large withdrawals, a service member would not receive any interest at the 

end of that policy year on the money withdrawn from the fund. Under this 

methodology, amounts withdrawn during the year earn no interest, thereby 

reducing (in some instances significantly) the advertised rate of return. 

Allegations of Improper 

Sales Practices often 

Associated with Companies 

Targeting Military Members 

Insurance companies that market primarily to military members have been 

frequently accused of using inappropriate sales practices by regulators, 

DOD, and others. As part of our review, we identified at least 15 lawsuits or 

administrative actions that had been taken against companies that market 

primarily to military members. In many of these actions taken by state and 

federal regulators, federal law enforcement organizations, or others, the 

companies were accused of misrepresenting the products as investments 

or identifying themselves as representatives of independent benefit or 

fraternal organizations. (Appendix II lists these actions.) For example, in 

December 1998, two of the insurance companies that target military 

members settled a lawsuit filed by DOJ in Washington state that alleged 

that their agents had misrepresented their insurance policies as investment 

plans. As part of the settlement the companies had to offer refunds to 

approximately 215 service members in certain states who purchased life 

insurance polices between 1994 and 1997. In an agreement with the 

Attorney General's Office in the state in which one of the companies was 

domiciled, each of the companies also made $1 million donations to a 

university in that state. More recently, after the Georgia Insurance and 

Safety Fire Commissioner initiated investigations to review allegations of 

improper insurance sales practices at military installations in that state, 

17End of year balance is the money accumulated in the fund during the policy year ending on 

the policy’s anniversary date.
Page 23 GAO-06-23 Financial Product Sales

two insurance companies have agreed to make refunds of about $2.4 

million to soldiers who had purchased insurance products. 

After a series of articles in The New York Times raised concerns over sales 

of financial products to military members, state regulators in as many as 14 

states began new investigations into the practices of companies that target 

service members.18 According to regulators in these states, various sales 

practice concerns are being examined. As of September 2005, the 

investigations by these states generally had not been concluded. In addition 

to efforts by insurance regulators, law enforcement organizations and 

securities regulators are also reviewing the activities of some of the 

insurance companies that target military members. 

One of the issues that is again a focus of regulators and others in their new 

investigations, is whether the companies and their agents were 

inappropriately marketing these products--not as insurance--but primarily 

as investment products. State insurance laws generally require any product 

with an insurance component to be clearly identified and marketed as 

insurance. However, regulators in various states raised concerns that the 

companies targeting service members were deemphasizing the insurance 

aspects of the product. Some state officials told us that the companies 

would have considerable incentive to obscure the insurance aspects of the 

product because 98 percent of service members already obtain a 

substantial amount of life insurance through the government-offered SGLI 

program. Insurance regulators we contacted told us that when marketing 

to military members these companies typically emphasize the investment 

provision of the products even though most, if not all, of the payments in 

the first year are used to pay the insurance premiums. Furthermore, most 

of this amount is then used by the companies to pay sales commissions to 

the selling agents. 

The marketing materials for the companies that we examined also 

emphasized the savings component of the products. For example, a script 

from a sales presentation of one company mentions the insurance coverage 

third, after describing other product benefits. It also highlighted that the 

cost of the insurance was “free” if the service member completes the 

product terms. Insurance regulators with whom we spoke mentioned that 

18Diana B. Henriques, “Basic Training Doesn’t Guard Against Insurance Pitch to G.I.’s,” New 

York Times, July 20, 2004 and “Insurers Rely on Congress to Keep Access to G.I.’s,” New 

York Times, July 21, 2004.
Page 24 GAO-06-23 Financial Product Sales

such a sales presentation is designed to overcome objections from service 

members that they did not need any additional life insurance. In addition, 

examiners in one state reported in 2002 that one of the companies’ 

materials referred to the premium payments for the insurance product 

being sold to service members as “considerations” or “contributions,” 

which were terms that they said were typically used when selling 

investment products. Our review of information provided by legal offices at 

Fort Benning, Georgia, and Great Lakes Naval Training Center, Illinois, also 

indicated issues related to insurance products being marketed and sold 

primarily as investment products. 

The design of the products themselves may have also been misleading. 

Despite emphasizing the investment returns and high rates of promised 

interest earnings that were possible with these products, regulators in one 

state told us that the companies may have assumed that their actual 

policyholders would not generally attain these returns. As part of a class 

action case previously filed against one of these companies, presented as 

evidence were a series of internal company memorandums dating from 

around the time the company was proposing to begin selling a combined 

insurance and saving fund product. In one of these documents, a company 

official states the assumption that product purchasers would not earn the 

initially-promised 11 percent interest, or any amount even close to that, 

because the product’s savings fund “is inextricably coupled with a rather 

expensive traditional life insurance policy,” and has restrictive interest 

crediting and withdrawal provisions. 

According to a deposition taken of a former company official, the company 

also assumed that many purchasers would not hold the product for very 

long. For example, this official stated that the company assumed that as 

many as 45 percent of purchasers would stop paying into the product 

within 1 year and another 25 to 30 percent would stop paying by years 2 

and 3. In contrast, data from a service that tracks the rates at which 

insurance policyholders stop paying on their policies—called lapse rates—

indicates that the lapse rate in the first year on term life policies requiring 

monthly premium payments averaged less than 15 percent.19

19LIMRA International/Society of Actuaries, Individual Life Insurance Persistency Study: 

Preliminary Results, (March 2005). 
Page 25 GAO-06-23 Financial Product Sales

Other federal regulators are also investigating the extent to which the 

companies that market primarily to military members were marketing 

insurance as investment products. According to SEC officials with whom 

we spoke, insurance products marketed as investments may need to be 

registered as securities. Currently, insurance policies and annuity contracts 

issued by an entity subject to supervision by state insurance or banking 

regulators are exempt from securities registration.20 Under existing case 

law, one factor that is important in determining whether an insurance 

product is entitled to this exemption is the manner in which the product is 

marketed. 21 Under a safe harbor created by SEC Rule 151, one condition 

for annuity contracts to avoid being subject to the federal securities laws is 

to not be marketed primarily as an investments. As of September 2005, SEC 

staff told us their inquiries into some of these companies’ operations were 

continuing. In addition, DOJ officials also confirmed that they are 

investigating some insurance companies that market primarily to military 

members. 

Officials with several of the companies that market primarily to military 

members told us that they clearly inform service members that the product 

they are offering is insurance. For example, officials at one of the 

companies showed us documents that they said are to be initialed and 

signed in multiple places by purchasers of their product that indicate that 

the product is insurance. An investigation by DOD personnel into sales at 

one naval facility indicated that many members knew they were buying 

insurance as well. However, an investigator of one of the states that 

previously sanctioned one of these companies told us that they had 

received information indicating that the company’s sales agents may have 

found ways to present the products without the service members realizing 

they were buying insurance. Such allegations illustrate the difficulties that 

regulators face in determining whether inappropriate sales practices were 

being used. 

20Section 3(a)(8) of the 1933 Securities Act exempts from securities registration any 

“insurance policy” or “annuity contract” issued by a corporation subject to the supervision 

of an insurance commissioner, bank commissioner, or similar state regulatory authority.

21Another important factor is the allocation of investment risk between insurer and contract 

owner.
Page 26 GAO-06-23 Financial Product Sales

Irregularities on Pay Allotment 

Forms Used for Deducting 

Premium Payments Being 

Investigated

Insurance regulators and other investigators are also investigating whether 

some of the companies have been misrepresenting the nature of the 

products in the forms used to initiate deductions for the premiums from 

service members’ pay. According to DOD staff responsible for personnel 

pay systems, service members can have various types of allotments 

deducted from their pay, including deductions to be sent to savings 

accounts or to pay for insurance they purchase. However, for insurance 

allotments for junior enlisted members (those at rank E-3 and below), a 7-

day “cooling off period” is required to pass before the allotment can be 

processed. Although these companies were selling insurance products, 

state regulatory officials we contacted were concerned that, in some cases, 

the companies were mislabeling the government pay deduction forms to 

reinforce the appearance that these purchases were investments and not 

insurance. For example, we reviewed pay allotment documents that 

appeared to indicate the service member purchasing this product was 

initiating a pay deduction that would be sent to a savings account in the 

member’s name at a bank. In addition, the service member would also be 

asked to complete a form that authorized the recipient bank to withdraw 

the premiums due on the insurance product from the service member’s 

account at that bank. However, state insurance regulators told us that the 

service members did not actually have accounts at these banks; rather, the 

money was deposited in a single account belonging to the insurance 

company. After we contacted officials at some of the banks to which these 

insurance companies were having service member payments routed, bank 

officials confirmed to us that the service members did not have accounts at 

the bank, but rather, contributions were sent to accounts belonging to the 

insurance companies. Thus, routing the payments to a bank with the 

allotment appearing as a bank allotment on the service member’s pay 

statement, rather than an insurance allotment, could reinforce the 

impression that the service member had purchased an investment product 

rather than insurance. Insurance regulators in one state also told us that 

they found instances in which insurance agents were assisting service 

members to access online military pay systems to add allotments for 

insurance premiums. 

Our own review found additional evidence of possible irregularities 

involving pay allotment forms and other activities by agents selling these 

combined insurance and saving products. During a review of documents 

used to initiate allotments from service members’ pay at two military 

installations we visited, we also found several examples of allotment 

deduction forms that seemed as though the service member involved had a 

savings account at a bank used by the insurance company. 
Page 27 GAO-06-23 Financial Product Sales

We also noted several other potentially irregular activities. In some 

instances, insurance agents mailed allotment forms to the finance office 

that processes pay transactions for service members stationed at one of 

these bases using bank envelopes that had a bank’s address as its return 

address. The use of bank envelopes could help convince base personnel 

that these were savings rather than insurance allotments, and thus not 

subject to any required “cooling off period.” In another example of 

insurance company agents attempting to make the service member 

allotments used to pay for these insurance products appear to be savings 

allotments, we saw multiple instances of the use of an allotment form 

bearing the signature of the same bank official as the initiator of the 

allotment. After we contacted this bank official, he told us that he had once 

signed such a form but that the repeated use of the form with his signature 

was being done by the insurance agents without his knowledge. The results 

of these reviews and indications of potential fraud were referred to our 

special investigators, who are conducting further reviews and have 

initiated contacts with other law-enforcement organizations, DOD 

investigative agencies, and state regulatory departments.

Our review of allotment forms raised questions about whether agents 

marketing products targeting military members were encouraging service 

members to reduce tax withholdings and other savings contributions, thus 

providing a source of income to invest in the insurance products. 

Specifically, we found several examples of forms canceling service 

members’ TSP contributions and altering the number of exemptions 

claimed on service members’ W-4 forms (reducing the amount of tax 

withheld from their pay) that were submitted along with insurance 

allotment forms. Forgoing investment in TSP (which is generally 

recognized as being one of the lowest-cost ways to invest for retirement 

available anywhere) to purchase expensive insurance would not generally 

be in the service member’s best interest financially. By reducing the 

member’s withholdings and TSP contributions, the agents in these cases 

may have been attempting to overcome service member objections about 

affording the additional payment for the insurance product. In addition, 

reducing a service member’s withholdings could potentially result in 

additional taxes due at year’s end.

Concerns Exist over Whether 

Insurance Company Personnel 

Represent Themselves as 

Members of Other Organizations 

Another sales practice issue that insurance regulators we contacted have 

been concerned about is whether some individuals that are selling 

insurance were not clearly representing themselves as insurance agents 

when marketing to military service members. In the past, DOD has found 

that insurance agents who have marketed to service members frequently 
Page 28 GAO-06-23 Financial Product Sales

identify themselves as counselors from benefits associations. Such entities 

provide counseling on obtaining government benefits or other services and 

may also offer their members discounts on other products, such as auto 

services. By representing themselves as benefits counselors, insurance 

agents may more readily gain access to service members. 

However, regulators and others have documented prior instances in which 

insurance agents marketing to military members misrepresented 

themselves as benefits association employees. For example, in December 

2002, DOJ announced a settlement against an insurance company that 

targeted military members whose agents had misrepresented themselves 

solely as employees of a benefits association. According to the DOJ 

complaint, this company had allegedly defrauded military service members 

who purchased life insurance policies from the company by having its 

agents pose as independent and objective counselors representing a nonprofit fraternal organization that offered as one of its benefits the ability to 

purchase the company’s life insurance.22 However, the company’s agents 

allegedly failed to disclose to the service members that they only were 

compensated through commissions from the insurance company, and that 

the company was making undisclosed payments to the benefits association 

for every policy sold. Under the terms of the settlement, the company 

agreed to, among other things, increase the face amount of all in force 

coverage by 6.5 percent, pay $2.7 million to all service members who 

canceled their policies during a specific period, and to never again sell 

another insurance policy or reapply for DOD permission to conduct 

business on U.S. military installations.23 According to a state insurance 

department investigation that was finalized in January 2002, agents from an 

insurance company that is currently being investigated by other states 

portrayed themselves as benefit association representatives without 

disclosing that they were insurance agents. As a result these agents were 

allowed to conduct military training during which they would solicit 

insurance to groups of service members. According to the report, the 

service members believed that the benefit association was part of the 

military establishment. 

22Complaint, United States v. Academy Life Insurance Co., U.S. Dist. Ct., E.D. Pa., Civil 

Action No. 02-9125 (Dec. 19, 2000).

23Settlement Agreement, United States v. Academy Life Insurance Co., U.S. Dist. Ct., E.D. 

Pa., Civil Action No. 02-9125 (Dec. 10, 2002).
Page 29 GAO-06-23 Financial Product Sales

Regulators Are Reviewing 

Whether Some Insurance 

Product Sales Comply With State 

and Federal Laws 

Another aspect of the operations of the companies that market primarily to 

military members that state insurance regulators were examining was 

whether the products comply with applicable state laws and regulations. 

For example, regulators in several states have been examining whether the 

saving funds that some of the companies had labeled as annuities may not 

actually qualify as such under their laws. After concerns arose about the 

sale of these combined insurance and savings products, insurance 

regulators in Washington state rescinded approval to sell the products that 

had previously been approved for sales by one of the companies that 

targeted the military in June 1997 and for three additional companies in 

October 2004. In taking these actions, the state’s insurance department 

noted that it had determined that the savings fund provision of these 

products the companies were marketing were not properly structured to 

meet the requirements of this state’s regulations pertaining to annuities.

Insurance Companies Targeting 

Military Members Also 

Frequently Accused of Violating 

DOD Solicitation Policies 

In addition to raising concerns among financial regulators, the companies 

that target military members also have been accused of violating DOD’s 

own solicitation policies. For example, DOD personnel conducted an April 

2005 proceeding in Georgia to review the practice of one of the companies 

currently being investigated by state insurance regulators regarding 

allegations of multiple violations of the DOD directive on insurance 

solicitation. Among the practices alleged at this hearing were misleading 

sales presentations to captive audiences and solicitations in unauthorized 

areas, such as in housing or barracks areas. DOD recently began 

maintaining an online listing of actions taken against insurance companies 

or their agents by various DOD installations.24 Last updated on August 11, 

2005, this web site lists 21 agents from some of the 6 companies that are 

permanently barred--or have had their solicitation privileges temporarily 

suspended--at 8 different military installations. 

24See http://www.commanderspage.dod.mil/dav/lsn/LSN/BINARY_RESOURCE/

BINARY_CONTENT/1827481.pdf. 
Page 30 GAO-06-23 Financial Product Sales

Concerns over such violations are longstanding. For example, in March 

1999, the DOD Inspector General also found that insurance companies 

were frequently employing improper sales practices as part of marketing to 

service members. Among the activities prohibited by DOD that the 

Inspector General report found were occurring included presentations 

being made by unauthorized personnel, presentations being made to group 

gatherings of service members, and solicitation of service members during 

duty hours or in their barracks.25 Similarly, a May 2000 report 

commissioned by the Office of the Under Secretary of Defense for 

Personnel and Readiness also reviewed insurance solicitation practices on 

DOD installations and identified many of the same concerns and 

recommendations as those the DOD Inspector General had identified.26 As 

result of these two reports, DOD officials began efforts to revise its 

directive governing commercial solicitation on military installations. 

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. These 

contractual plans were primarily being sold by one large firm and several 

smaller firms that generally marketed only to service members. These 

products involve making periodic investments into a mutual fund under 

contractual agreements with much of the first year’s investments going to 

pay a sales load that compensates the selling broker-dealer. Purchasers that 

make all required payments for the entire term of the contractual mutual 

fund plan would pay charges slightly less than the amount charged by other 

load funds. However, regulators found that most military purchasers were 

not making all required payments, resulting in them paying higher sales 

charges than would have been paid on other commonly available mutual 

funds. Regulators indicated that contractual plans are rarely sold to 

civilians and the products have been associated with sales practice abuses 

for decades. Regulators recently sanctioned the largest seller of these plans 

for inaccuracies in its marketing materials. Investigations into the activities 

of other broker-dealers selling contractual plans are also underway.

25DOD, Commercial Life Insurance Sales Procedures in DOD, DOD Office of the Inspector 

General Report No. 99-106 (Arlington, VA: Mar. 10, 1999).

26DOD, Final Report: Insurance Solicitation Practices on Department of Defense 

Installations, Office of the Under Secretary of Defense for Personnel and Readiness 

(Washington, D.C. May 15, 2000).
Page 31 GAO-06-23 Financial Product Sales

Most Contractual Plans 

Were Sold in the Military 

Market by One Firm

Although being sold to large numbers of service members, contractual 

mutual fund plans were being marketed by only a few broker-dealers. SEC 

and NASD staff told us that their investigations have identified only about 

five broker-dealer firms that were marketing these plans. According to 

regulators, one of the broker-dealers accounted for over 90 percent of the 

$11 billion invested in contractual plans as of year-end 2003. Unlike the 

insurance companies that targeted junior service members, this brokerdealer generally marketed its products to more experienced military 

members, including commissioned officers and senior noncommissioned 

officers. 

According to its marketing materials, this firm had nearly 300,000 military 

customers, and indicated that one-third of all commissioned officers and 40 

percent of active duty generals or admirals were clients. The firm employs 

about 1,000 registered representatives in more than 200 branch offices 

throughout the United States, as well as locations in Europe and in the 

Pacific region. The great majority of the firm's sales representatives are 

former commissioned or noncommissioned military officers. From January 

1999 through March 2004, the firm received approximately $175 million in 

front-end load revenue from the sale of contractual plans. Officials with the 

firm announced in December 2004 that they would be voluntarily 

discontinuing sales of contractual plans after being sanctioned by SEC and 

NASD. 

The other four firms that continue to sell contractual plans were smaller 

broker-dealers. Of these, regulators told us that three also principally 

targeted military service members although, unlike the largest brokerdealer, these three firms generally sold contractual plans to junior enlisted 

personnel. According to regulators, the fourth broker-dealer appeared to be 

marketing to civilians. However, given the availability of other alternative 

low-cost mutual fund products in the marketplace that allow investors to 

make relatively small contributions on a regular basis, regulators indicated 

that they rarely see contractual plans being sold to civilians by other firms.
Page 32 GAO-06-23 Financial Product Sales

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).27 These payments are 

invested into funds offered by some of the largest mutual fund companies. 

Under the contractual plan, the firm deducts a sales load of up to 50 

percent from each of the first year’s monthly payments but generally no 

further sales loads are applied thereafter. In contrast, a conventional 

mutual fund with a sales load will deduct a certain percentage—currently 

averaging about 5 percent—from each contribution made into the fund. 

While sales charges for contractual plans are initially much higher than 

those of other mutual fund products, the effective sales load—the ratio of 

the total sales charge paid to the total amount invested—becomes lower as 

additional investments are made. Over time the effective sales load for a 

contractual plan will decrease to a level comparable to—or even lower 

than—other conventional mutual funds with a sales load.28 As illustrated in 

Figure 5, if all 180 monthly payments are made under a contractual plan, 

the effective sales load on the total investment decreases to 3.33 percent by 

year 15. 

27Under the contractual payment plans commonly sold in the military market, the investor is 

to pay 180 fixed monthly installments (15 years), which may be extended to 300 payments 

(25 years) at the investor's option with no additional sales charge.

28Many mutual funds that are sold with sales charges or loads offer discounts to investors 

who invest certain amounts of money. As such, if an investor continues to invest in a 

conventional mutual fund over time, eventually the sales charge percentage of that fund will 

decrease as the total initial investments reach a certain amount, such as $25,000 or $50,000. 
Page 33 GAO-06-23 Financial Product Sales

Figure 5: Mutual Fund Sales Load as a Percentage of Investment by Year 

At one time, contractual plans were the only way for small investors to 

invest in mutual funds. Regulators told us that in the past, many mutual 

funds required large initial investments that prevented them from being a 

viable investment option for many individual investors. However, today, 

other lower-cost alternatives exist for small investors to begin and maintain 

investments in mutual funds. For example, many mutual fund companies 

now allow investors to open a mutual fund account with a small initial 

investment, such as $1,000, if additional investments—including amounts 

as low as $50 per month---are made through automatic withdrawals from a 

bank checking or savings account. According to a recent study by the 

mutual fund industry association, over 70 percent of the companies 

offering S&P 500 index mutual funds in 2004 had minimum initial 

investment amounts of $1,000 or less, with 9 having minimum investment

Source: GAO analysis.

Percentage

Contractual plan load

Traditional plan load

Plan year

0

10

20

30

40

50

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Page 34 GAO-06-23 Financial Product Sales

amounts of $250 or less.29 Securities regulators saw the wide availability of 

such products as the reason that contractual plans were rarely being 

offered to most investors. Another alternative investment option available 

to service members since 2002 is the government-provided TSP. 

Comparable to 401(k) retirement plans available from private employers, 

service members can invest up to 10 percent of their gross pay into TSP 

without paying any sales charge. The various funds offered as part of TSP 

also have much lower operating expenses than other mutual funds, 

including those being offered as contractual plans. Service members could 

also choose to invest as many other investors do in mutual funds offered by 

companies that do not charge any sales load. Called no-load funds, these 

are available from some of the largest mutual fund companies through tollfree numbers, the Internet, or by mail. 

According to industry participants, contractual plans provide their 

purchasers with the incentive to invest for the long term. Officials from the 

most active broker-dealer that marketed contractual plans told us that the 

larger upfront sales load encourages the investor to maintain a long-term 

investment plan because of the financial penalty that results from halting 

their payments too early. They also said that the contractual nature of the 

product helps purchasers make regular investments. In addition, these 

officials explained that the clients they serve are not high-income 

individuals with considerable accumulated wealth available for investment. 

As a result, they said that other broker-dealers do not provide financial 

services to these individuals. The officials from this firm said that their 

sales representatives spend many hours explaining the products and 

preparing and updating financial plans for their military clients. As a result, 

the higher up-front sales charge compensates their staff for the amount of 

time spent with clients. Officials from this firm told us that clients who 

purchased contractual plans and received financial plans from their firm 

generally benefited as the result of an improved financial condition overall.

Many Service Members 

Failed to Benefit from 

Contractual Plans 

However, according to data obtained from securities regulators, many 

service members did not benefit from purchasing contractual plans. 

Although such plans can prove beneficial to an investor that makes all of 

the required periodic payments, regulators found that many service 

29The study identified 98 companies offering S&P 500 index funds. See Investment Company 

Institute, “Are S&P 500 Index Mutual Funds Commodities?” Perspective Vol. 11 No. 3 

(August 2005). 
Page 35 GAO-06-23 Financial Product Sales

members were not investing in their plans for the entire term. For example, 

SEC and NASD found that only 43 percent of the clients that purchased 

plans between 1980 and 1987 from the largest broker-dealer had completed 

the full 15 years required under the contract. Instead, 35 percent of these 

clients that bought during this period had terminated their plans early. 

Another 22 percent had not cancelled their plans but were not making 

regular payments. According to securities regulatory staff, most of the 

clients that stopped making payments into this broker-dealer’s contractual 

plans ceased doing so after about 3 years. 

SEC staff told us that the customers of the other broker-dealers that were 

marketing contractual plans to military members had the same or even 

lower success rates of contracts completion. For example, they said that 

only about 43 percent of the clients of one of these broker dealers had 

made all required payments for a full 15-year period and, at another firm, 

just 10 percent of the customers had successfully completed a plan. 

Because of the manner in which sales charges are assessed, terminating a 

contractual plan or halting payments early can greatly reduce the benefits 

to an investor. If the investor does not continue paying into the plan, the 

effective sales load can be much higher than industry norms. For example, 

as shown previously in Figure 5, an investor terminating after 3 years pays 

an effective sales load of 17 percent of the amount invested, which is more 

than three times the current average sales load in the mutual fund industry. 

As result, many of the service members that purchased contractual plans 

from these firms likely paid much higher sales charges than they would 

have under other alternative investments. Even if an investor makes all 

required payments under a contractual plan, we found that the amount 

accumulated on a contractual plan investment earning a 7 percent annual 

return is lower than that of a conventional mutual fund with a 5 percent 

sales load earning the same projected return until at least year 16 (this 

analysis is shown in appendix III). 
Page 36 GAO-06-23 Financial Product Sales

Long Associated with Sales 

Practice Abuses, Firms 

Marketing Contractual 

Plans Again Raising 

Regulatory Concerns 

Contractual plans have long been associated with sales practice concerns 

and recently regulators have taken action against the largest seller of these 

products. According to an SEC study, contractual plans to sell mutual fund 

securities were first introduced to the public in 1930.30 However, concerns 

over the sale of these products, including excessive sales charges, arose 

and, as a result, the subsequently-enacted Investment Company Act of 1940 

included a provision that limited the sales load that could be charged on 

contractual plans. After the passage of the Act, sales of contractual plans 

declined, with most of the companies selling such plans halting their 

marketing of such products. 

However, during the 1950s and 1960s sales of contractual plans 

significantly increased. With researchers finding that many contractual 

plan purchasers were not continuing to invest in their plans, SEC 

recommended that the Investment Company Act of 1940 be amended to 

prohibit future sales of contractual plans. Although Congress chose not to 

ban contractual plans, it amended the Act in 1970 to increase protections 

for contractual plan investors. Specifically, Section 27 was revised to allow 

investors who cancel their plans within the first 18 months of purchase to 

obtain refunds on that portion of the sales charges which exceeds 15 

percent of the gross payments made.31 In addition, investors terminating 

their plan within the first 45 days could receive their full investment back 

with no sales charge deductions. 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 again found inappropriate sales practices associated 

with contractual plans even after this provision was changed. For example, 

in the early 1990s, federal and state securities regulators took action 

against a broker-dealer, First Investors Corporation, for improper 

marketing of contractual plan investments, including its alleged failure to 

notify investors that they could invest in the same funds without having to 

pay the high sales charge required under the contractual plan. During this 

period, other low-cost mutual fund products emerged in the marketplace, 

allowing investors to make relatively small monthly payments into a mutual 

fund product with low fees. The contractual plan product generally 

30SEC, Public Policy Implications of Investment Company Growth, H.R. Rep. No. 2337, 

89th Cong., 2d Sess. (1966). 

31Pub. L No. 91-547 §16, codified at 15 USC §80a-27(d).
Page 37 GAO-06-23 Financial Product Sales

disappeared from the civilian marketplace but continued to be sold in the 

military market by a few firms, with one emerging as the dominant player 

in this niche market. 

Recently, securities regulators have taken actions against a firm marketing 

contractual plans to military service members. In December 2004, SEC and 

NASD sanctioned the broker-dealer firm that was the dominant seller of 

such plans to service members. According to settlements reached with 

these regulators, the firm’s marketing materials were alleged to have been 

misleading and to have inappropriately disparaged other viable investment 

options available to their clients. For example, according to the regulators, 

the firm’s marketing materials allegedly included various misleading 

comparisons of contractual plans to other mutual funds, including 

characterizing non-contractual funds as attracting only speculators, and 

erroneously stating that withdrawals by investors in other funds force the 

managers of those funds to sell stocks. The regulators also alleged that the 

firm’s materials did not present the low-cost TSP as a viable alternative to 

their contractual plans. The SEC and NASD settlements also alleged that 

the firm mischaracterized the contractual plan’s high up-front sales load as 

the only way to ensure that purchasers remain long-term investors and 

presented comparisons of contractual plans using a holding periods of 

more than 14 years despite having data within the firm that showed that 

many of its customers were not successfully completing their plans. As a 

result, securities regulators found that the firm’s service member clients 

paid higher than normal sales charges because they frequently did not 

continue making enough payments into such plans to reduce the effective 

sales charges to a level comparable to typical mutual fund sales charges in 

the industry. 

The regulators also took action against the firm for inappropriate handling 

of customer complaints. As part of its investigation into this firm’s 

practices, NASD sanctioned the firm for the actions of one of its 

supervisors who made improper statements to a service member who had 

previously expressed dissatisfaction with the broker-dealer. The regulatory 

settlement provides a summary of a call made to this customer in which the 

firm’s supervisor appeared to threaten the service member with adverse 

consequences from his military superiors, including possible cancellation 

of his previously approved temporary duty orders. 
Page 38 GAO-06-23 Financial Product Sales

In settling with SEC and NASD, the broker-dealer agreed to pay a total of 

about $12 million, including restitution to compensate customers who paid 

an effective sales charge of more than five percent on investments made 

since January 1999. As of October 6, 2005, $4.3 million has been paid to 

investors. The remaining money is to be used to fund an educational 

program for service members that NASD will administer (this program is 

described later in this report). As previously stated, this broker-dealer 

announced that it has voluntarily discontinued sales of contractual plan 

products. SEC and NASD continue to investigate the other smaller brokerdealer firms that are marketing contractual plan products to military 

members and others. In addition, SEC staff also began conducting reviews 

of sales to military members in overseas locations and at installations in the 

United States. Two bills before the U.S. Senate (one of which passed the 

House of Representatives) would amend Section 27 of the Investment 

Company Act of 1940 to ban further sales of contractual plans.32

Lack of Complaint 

Sharing Prevented 

Earlier Identification of 

Improper Sales to 

Military Members 

A lack of routine complaint sharing between financial regulators and DOD 

was the primary reason that regulators did not identify problematic sales of 

financial products to military service members before such issues were 

raised in press accounts, although other limitations among regulators’ 

practices also contributed. Insurance companies are generally required to 

submit products for regulatory approval before marketing them but the 

review processes in most states may not have addressed the 

appropriateness of their features for service members. Although insurance 

regulators in some states review sales activities periodically, insurance 

regulators in most states generally rely on complaints from purchasers to 

indicate that potentially problematic sales are occurring. One reason that 

insurance company sales activities are not reviewed more extensively is 

because most states lack any appropriateness or suitability standards for 

insurance products. Although some states had taken action, other state 

insurance regulators were not generally aware of problems involving 

military members until recent press reports, in part because DOD 

personnel were not usually sharing complaints or information about other 

inappropriate practices regarding the companies that targeted service 

members. However, we found evidence that concerns over inappropriate 

sales to service members exist widely at various military installations. 

Similarly, securities regulators also did not identify recent problems 

32S. 418, Sec. 3, and H.R. 458, Sec. 102.
Page 39 GAO-06-23 Financial Product Sales

involving contractual plan sales to service members until such press 

accounts appeared. These regulators’ ability to detect problems was also 

hampered by the lack of information on the extent to which broker-dealer 

customers purchasing contractual plans were successfully making their 

payments. In light of the problems surrounding sales of financial products 

to military members, DOD has efforts underway to revise its policies 

regarding such sales and has reviewed ways in which it could share 

additional information. However, DOD has not coordinated these efforts 

with military installation personnel or with regulators.

Without Complaints, 

Regular Insurance 

Regulatory Processes Did 

Not Identify Problems

The product approval processes followed by many insurance regulators did 

not allow them to identify the products being marketed to military 

members as potentially problematic. One of the ways that state insurance 

regulators ensure that the products being sold in their states comply with 

insurance laws and regulations is through product approval requirements. 

Although insurance regulators in most states require insurance companies 

to submit products for approval before marketing them, state insurance 

officials in the states we contacted explained that the processes for 

approving products varied. In several of these states, insurance companies 

must submit products to the state regulators for reviews that are intended 

to assess whether the provisions and terms of the products comply with 

existing insurance regulations in those states. Companies sometimes 

submit additions to existing products, called riders, which change terms or 

provide additional features to their policies. However, according to some 

regulators in the states we contacted, the entire product may not be 

reexamined by their reviewers when such riders are submitted. In at least 2 

states we contacted, different components of products sold to military 

members were filed and approved separately but then marketed and sold 

as a single product. For example, the savings fund of the insurance product 

being sold by four of the companies that target military members was 

submitted as a rider to a previously approved policy. 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 at least one state we 

contacted, many insurance products are not reviewed but can be sold 

immediately upon filing notification with their department of the 

company’s intent to market the products. 

Additionally, insurance product approval processes may not necessarily 

reveal how a product is to be marketed or the target market for the 

product. According to officials in the state insurance departments we 

contacted, none of these states required insurance companies to provide 
Page 40 GAO-06-23 Financial Product Sales

descriptions of the target market for a particular product during the form 

filing process. As part of the investigations that state insurance regulators 

are conducting of the companies that target military members, some of the 

regulators are also reexamining the products these companies sell to 

ensure that they meet existing state requirements. For example, insurance 

regulators in Virginia issued an order in September 2005 to three 

companies to cease and desist from selling such products. However, the 

extent to which this review is occurring in other states is not clear. 

Insurance Regulatory 

Examinations Generally Focus 

on Financial Soundness

State insurance regulators may conduct various types of reviews of the 

insurance companies they oversee. Many of the routine reviews that these 

regulators conduct focus on insurance companies’ financial soundness. 

During such examinations, the regulators assess the quality of insurance 

companies’ assets and whether their income is sufficient to meet present 

and future financial obligations to their policyholders. 

Some state insurance regulators also review some aspects of insurance 

product sales as part of market conduct examinations. Designed to help 

protect consumers from unfair practices, market conduct reviews are done 

for a wide range of company practices, including sales, underwriting, and 

claims processing and payment.33 For example, a regulator may review a 

sample of sales by a particular company to ensure that its agents have not 

misrepresented products or otherwise violated the requirements of their 

particular state. Although some states routinely perform market conduct 

reviews of the companies they oversee, most states only conduct such 

investigations when they receive complaints from customers or otherwise 

obtain information that raises concerns about the activities of an insurance 

company. 

33GAO, Insurance Regulation: Common Standards and Improved Coordination Need to 

Strengthen Market Regulation, GAO-03-433 (Washington, D.C.: Sept. 30, 2003). 
Page 41 GAO-06-23 Financial Product Sales

Many States Lack 

Appropriateness or Suitability 

Standards

One reason that insurance regulators do not review insurance company 

sales practices more routinely is that standards requiring that any 

insurance products sold be appropriate or suitable for the purchaser do not 

generally exist. As a result, when an insurance regulator receives a 

complaint or other information indicating that potentially problematic 

sales have occurred, they can review the marketing practices of any 

insurance companies involved to assess whether any misrepresentations or 

other fraudulent activities occurred. However, under most state insurance 

laws, insurance regulators do not have the authority to evaluate whether 

the product sold was appropriate or suitable given the customer’s needs. In 

contrast, broker-dealers selling securities products are required to assess 

the financial circumstances of their customers to ensure that any products 

they recommend to these customers are suitable. Specifically, brokerdealers are required to consider such factors as their customer’s income 

level, investment objectives, risk tolerance, and other relevant 

information.34 

State regulators and others have tried to establish suitability standards for 

insurance products, but these efforts have generally not been successful. 

For example, in 2001, NAIC formed a working group to collect and analyze 

data, prioritize key issues for examination, and assess interstate 

cooperation in developing guidelines for market conduct standards. These 

market conduct standards would be intended to protect consumers from 

abuses in the insurance market, including those related to the availability 

and affordability of insurance. Using such standards, state insurance 

regulators would review the underwriting and marketing practices of 

insurance companies and their agents. 

34NASD Rule 2310, Recommendations to Customers (Suitability), states that in 

recommending to a customer the purchase, sale, or exchange of any security, a brokerdealer is required to have “reasonable grounds for believing that the recommendation is 

suitable for such customer upon the basis of the facts, if any, disclosed by such customer as 

to his other security holdings and as to his financial situation and needs.” For example, 

recommending a product that poses a high risk of loss to an investor on a limited income 

could represent an unsuitable recommendation. 
Page 42 GAO-06-23 Financial Product Sales

However, after being unable to come to consensus on suitability standards 

that would apply to all insurance sales, the NAIC working group narrowed 

its approach. Instead, the group drafted a model law that provided 

standards for annuity products sold to seniors age 65 and over.35 This draft 

model legislation would require that before insurance agents recommend 

the purchase or exchange of an annuity, they must take into account the 

purchaser’s financial situation (including other investments or insurance 

policies owned) and reasonably believe that the recommendation is 

suitable for the purchaser. As of July 2005, NAIC reported that only nine 

states had fully or partially adopted this model law, 10 others already had 

similar or related legislation, and 35 states or territories had yet to take any 

action. 

Other organizations have also attempted to develop suitability standards. 

For example, the Insurance Marketplace Standards Association (IMSA) has 

developed various standards applicable to insurance companies’ marketing 

practices. IMSA also provides qualification to companies that comply with 

its marketing practices standards.36 After becoming IMSA qualified, a 

company’s salesforce would be expected to assess a potential buyer’s need 

for insurance before recommending its purchase. A representative of IMSA 

told us that insurance companies and agents following IMSA’s guidelines 

for conducting a needs-based selling analysis would review a customer’s 

insurable needs and financial objectives to determine the appropriate life 

insurance product, if any, to be offered. In many cases, junior service 

members with no dependents may not need additional life insurance 

beyond that available through the low-cost, government-offered SGLI. 

However, none of the six companies that were primarily marketing to 

military members with the combined insurance and savings product were 

IMSA qualified. 

35In an annuity contract, an insurer agrees to make a series of payments for a specified 

period or for the life of the contract holder, providing insurance against the possibility that 

the contract holder will outlive his or her assets during the period covered under the 

contract.

36To become IMSA-qualified, an insurance company must conduct a self assessment of its 

ability to comply with IMSA’s market conduct standards, which is reviewed by a Qualified 

Independent Assessor authorized to conduct an independent assessment of the company’s 

policies and procedures on behalf of IMSA. A company must undergo the self and 

independent assessment every 3 years in order to retain its IMSA qualification. 
Page 43 GAO-06-23 Financial Product Sales

Legislation has been proposed that would require insurance regulators and 

DOD to work together to study ways to improve the quality of--and 

practices used to sell--life insurance products sold on military installations. 

For example, one option offered by these bills would be to only allow those 

companies that have met best practice procedures (such as those 

developed by IMSA) to sell insurance on military installations. These bills 

also propose that standards that would apply to the sale of products to 

military members could be developed.37

Concerns and Complaints 

Existed at Military Installations

Although concerns or complaints involving insurance sales existed on DOD 

installations, insurance regulators we contacted mentioned that they 

generally have not historically received complaints from DOD officials 

about potentially problematic sales of products to service members. The 

actual extent to which service members have concerns or complaints 

involving insurance product sales is not known because, as we reported in 

June 2005, DOD only recently began systematically collecting information 

on violations of DOD’s solicitation policy by sellers of financial products.38 

However, the DOD reports described earlier in this report, and work we 

conducted for this report and several other reports we recently issued, 

appears to indicate that concerns over inappropriate practices related to 

product sales among military members was widespread. For example, for 

our April 2005 report on the financial condition of military members, we 

surveyed 175 U.S. installation-level managers of DOD’s personal financial 

management program, which provides service members with financial 

literacy training, financial counseling, and other assistance to avoid or 

mitigate the adverse effects associated with personal financial problems.39 

We reported in June 2005 that about 25 percent of the managers surveyed 

believed that insurance company representatives occasionally made 

misleading sales presentations at their installations during 2004, and 12 

percent believed that such presentations were made routinely. 

At the two bases visited as part of work for this report, we also found 

evidence that service members had concerns or complaints about the 

marketing practices used by sales personnel from some of the companies 

that targeted military members. After complaints were raised by some 

37S. 418, Sec. 9, and H.R. 458, Sec. 108.

38GAO-05-696.

39GAO-05-348.
Page 44 GAO-06-23 Financial Product Sales

service members at these bases, military personnel conducted 

investigations of the matters. For example, at Fort Benning, Georgia, 

statements were taken from several service members that were solicited 

insurance products between 2001 and 2004. Of the 41 statements in the 

investigative files that we were able to review, more than 70 percent 

indicated that the sales personnel had described the product as a savings or 

investment product. Additionally, almost all of these service members 

indicated that the insurance company sales personnel had taken actions 

that violated one or more of the restrictions in DOD’s solicitation policy, 

such as making these sales presentations during group training sessions. 

At Great Lakes Naval Training Center, base legal advisers told us they do 

not receive many complaints because service members were often being 

solicited shortly before they transferred to other installations. However, 

legal staff at Great Lakes Naval Training Center showed us documentation 

related to 5 complaints pertaining to insurance products from service 

members between January and June 2005. In addition, they also indicated 

that they have also seen complaints arising from other military installations 

after leaving Great Lakes Naval Training Center. We also spoke with 

finance office personnel at this base who had become concerned about the 

sale of insurance to service members occurring there. As a result, these 

personnel had retained copies of some of the pay deduction allotment 

forms submitted for processing between June and September 2004. 

Numbering over 100, the copies represented forms that had been used to 

initiate pay deductions for products purchased by base service members 

from three different insurance companies, according to military pay 

personnel. We attempted to contact a random selection of these service 

members. We were able to speak with three of the service members and a 

spouse representing a service member who had purchased these products, 

and all indicated that the insurance product they had purchased had been 

generally represented as an investment. 

However, state insurance regulators we contacted generally were not 

aware of the potentially problematic sales to military members because 

they generally were not receiving information about concerns or 

complaints from military personnel. These state insurance regulators and 

NAIC officials told us that they had received few complaints involving 

military members. For example, as part of our June 2005 report, we 

surveyed insurance regulators in 50 U.S. states and 4 territories and 

received 48 responses. Of these, regulators in only 8 states indicated that 

they had received life insurance related complaints from service members 

or on their behalf between October 2003 and December 2004. 
Page 45 GAO-06-23 Financial Product Sales

According to the director of the DOD office that oversees commercial 

solicitations on military installations, information about service member 

concerns or complaints involving financial product sales are not generally 

shared with state regulators for several reasons. In some cases, service 

members expressing reservations about purchasing one of these products 

might have received advice from other members or from superior officers 

to cancel, rather than complain to a regulator. In other cases, DOD officials 

told us that base personnel will work directly with the selling company to 

resolve a matter rather than involving a financial regulator. For example, a 

service member with concerns about a purchase of a financial product 

could consult with the installations’ legal advisers from the judge advocate 

general staff. However, DOD officials stated that interactions between 

service members and these staff are covered by attorney-client privilege 

and thus are more difficult to share with external parties, such as financial 

regulators. Attorneys representing two state insurance departments 

believed that DOD attorneys should be forwarding such complaints 

because this would be in the best interest of the service members. They 

emphasized that complaints related to financial products should be 

forwarded to the financial regulators that can take action on behalf of the 

service members. They emphasized that failure to notify regulators that 

there are service members with concerns about financial product sales 

deprives regulators of important information necessary for their oversight 

processes to function properly. 

In some cases in which military installations have reported concerns or 

complaints, regulators have been able to take action against insurance 

companies that conduct business with military service members. For 

example, regulators in Maryland were notified in the 1990s about potential 

improprieties involving sales of insurance products to junior enlisted 

personnel by a concerned official at one military training base in their state. 

In an examination report issued in January 2002, insurance regulators 

found that companies (including some of those that are currently being 

investigated by other states) marketing combined insurance and savings 

products to military personnel in Aberdeen Proving Grounds and other 

locations had violated various state laws and regulations and had misled 

some service members about the nature of the products, including 

misrepresenting insurance products as investments.40 As noted previously, 

regulators in Washington state also became aware of problematic sales at 

40See Maryland Insurance Administration Market Conduct Examination Report of Life 

and Health Business, Report No. 490-01 (Baltimore, MD: Jan. 25, 2002). 
Page 46 GAO-06-23 Financial Product Sales

military installations in their state in the 1990s. This state eventually took 

action to rescind approval of certain insurance products where the side 

savings fund did not meet the state’s requirements for an annuity, a 

premium deposit fund, or a universal life product. 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.

Lacking Complaints and 

Data on Actual Customer 

Experiences with 

Contractual Plans, 

Securities Regulators Were 

also Unable to Identify 

Problems Involving Sales to 

Service Members

Lacking information on complaints and data on the extent to which brokerdealer customers were successfully completing contractual mutual fund 

plans, securities regulators, similar to insurance regulators, also did not 

identify problems involving military members until press reports appeared. 

Although SEC and NASD, which has primary regulatory responsibility over 

the broker-dealers that were marketing contractual plans to service 

members, took enforcement actions against the firm that was the largest 

marketer of these products in late 2004, both regulators had conducted 

earlier examinations of this firm and did not identify any significant 

problems. SEC and NASD staff told us that identifying the problems 

involving the sale of this product was made more difficult because neither 

of the regulators had previously received any complaints about the firm 

from service members. However, NASD staff told us that after a DOD 

online periodical reported in 2003 that securities regulators were reviewing 

contractual plan sales, DOD staff received several inquiries from service 

members who had concerns about the products they had purchased. To the 

securities regulator staff, this provided evidence that concerns or 

complaints from military members were not being directed to the 

regulators--either by the service members themselves, or by the DOD 

personnel aware of such concerns. 

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. For example, in response to an article in The 

Wall Street Journal in 2002 that raised questions about the appropriateness 

of the sales of such plans to military members, SEC staff reviewed the
Page 47 GAO-06-23 Financial Product Sales

operations of the largest seller of contractual plans.41 According to SEC 

staff, their review did not raise any major concerns because they found no 

evidence that military members were complaining about their purchases 

from this firm. In addition, the firm provided the SEC staff with documents 

that purported to show that the persistency rate for the contractual plans—

which represented the proportion of plans that were still open---was over 

80 percent for the previous 3 years. The SEC staff told us that their 

examiners accepted these statistics as valid because they were also able to 

obtain data from one of the major mutual fund companies whose funds 

represented the majority of those in which this broker-dealer’s customers 

had invested. The data showed that most of this broker-dealer’s customers 

still had open plans with the company. 

After an article that raised concerns about contractual plan sales to military 

members appeared in Kiplingers, a personal financial magazine, in 2003, 

NASD staff also initiated an examination of this broker-dealer.42 According 

to NASD staff, although they had concerns over the sales of the contractual 

plan product, obtaining data on the extent to which the firm’s customers 

were continuing to make payments and successfully completing their plans 

was difficult, particularly since no specific requirement mandates that 

broker-dealers maintain records or standardized data. According to NASD 

staff, this firm maintained various sets of data on its contractual plan 

customers and becoming familiar with the differences in the information 

and determining what would be most useful for their reviews proved to be 

difficult and time consuming. They also noted that their existing 

examination procedures did not address issues such as persistency rates 

that were found to be relevant to examining contractual plans. 

However, these regulators were able to identify concerns after they 

required the firm to provide comprehensive data on all customers that 

purchased such products. According to SEC and NASD staff, they were 

able to determine how successful this firm’s customers were being with 

their contractual plans only after they required the firm to provide specific 

data on all customers that purchased contractual plans covering a full 15-

year period. After obtaining this data, regulators determined that the actual 

proportion of customers making all required payments for the 15-year term 

41Tom Lauricella, “Some Military Investors Bear a Heavy Load” The Wall Street Journal, C.1. 

(New York, N.Y.: Nov 27, 2002). 

42Steven T. Goldberg, “Funds: A Marketer is Selling funds with Sky High Fees to Military 

Personnel,” Kiplinger’s Personal Finance, Volume 57, No. 9, p. 53 (Sept. 2003).
Page 48 GAO-06-23 Financial Product Sales

of the plans was only 43 percent. This percentage was about half of the 

persistency or success rate shown in documents that the firm had 

previously provided to the regulators during their prior examinations, 

because the previously supplied data had excluded any customer whose 

account remained open but had not made any payments in the last year. 

However, in the view of regulators, investors that were no longer making 

payments into their plans should be taken into consideration when 

determining the overall extent to which a firm’s customers were 

successfully completing their plans. 

DOD also Taking Actions to 

Address Problematic Sales 

to Military Members, but 

Remains Reluctant to Fully 

Share Information with 

Financial Regulators

DOD has also taken some actions to address potentially problematic sales 

of financial products to service members, although it does not currently 

share all relevant information with financial regulators. The primary way 

that DOD attempts to protect service members from inappropriate sales is 

through its directive on commercial solicitation on military installations. 

This directive, DOD Directive 1344.7, is administered by the Office of the 

Under Secretary of Defense for Personnel and Readiness. The directive 

currently places various requirements and restrictions on financial firms 

seeking to market products on military installations in the United States 

and overseas. For example, it prohibits sales from occurring as part of 

group meetings and instead requires financial institution personnel to make 

an advance appointment and meet with service members individually. In 

addition, sales personnel that are former military members are also 

prohibited from using their military identification to gain access to an 

installation. In the event that a company, its agents, or representatives 

violate DOD’s solicitation policy, installation commanders can permanently 

withdraw the company’s or individuals’ solicitation privileges through a 

ban or can temporarily suspend those privileges for a specified period. 

Following the DOD reports that detailed issues and concerns associated 

with insurance sales to military members, staff within the Office of the 

Undersecretary for Defense for Personnel and Readiness began efforts to 

revise DOD’s solicitation directive. In April 2005, DOD sought public 

comments on a revised directive that incorporates new requirements. For 

example, the revised directive expressly prohibits insurance products from 

being sold as investments. In addition, it also includes a new evaluation 

form that is intended to be completed by each service member that has 

been solicited. The form would allow service members to indicate, with yes 

or no answers, whether the individual soliciting them violated certain 

aspects of DOD’s policy, such as contacting them during duty hours. The 

evaluation form also has questions relating to salespersons’ conduct during 
Page 49 GAO-06-23 Financial Product Sales

any solicitation, such as whether they pressured the service member into 

making a purchase, failed to provide adequate information, or implied that 

they were endorsed by the military. 

In addition to revising its solicitation directive, DOD personnel have also 

taken enforcement actions against several insurance agents for improper 

solicitations at several military installations. For instance, at Fort Benning, 

an insurance company and its agents that operate in the military market 

segment were banned from conducting sales on the base. Additionally, 

several military personnel in supervisory positions were also disciplined 

for allowing improper insurance solicitations to occur and not properly 

enforcing existing solicitation policies. 

DOD Lacks Requirements to 

Comprehensively Share 

Violations and Complaints with 

Financial Regulators 

Although DOD has taken some steps to better protect its service members 

from inappropriate financial products, DOD does not currently require its 

personnel to share all relevant information with financial regulators, 

including complaints from service members. DOD’s current policy 

regarding financial product solicitation only requires installation 

commanders to notify the appropriate regulatory authorities if they 

determine that an agent or company does not possess a valid license or has 

failed to meet other state or federal regulatory requirements. However, the 

draft of the revised solicitation directive includes provisions that would 

require installation personnel to report all instances in which they ban or 

suspend the solicitation privileges of any companies or individuals selling 

financial products to the Principal Deputy Under Secretary of Defense for 

Personnel and Readiness. The legislation being considered in Congress 

would also require DOD to maintain a list of names, addresses, and other 

appropriate information of any individuals selling financial products that 

have been barred, banned, or limited from conducting business on any or 

all military installations or with service members.43 

DOD has already begun collecting and publishing information on actions 

taken by individual installations for violations of the solicitation policy. As 

noted previously, DOD has already consolidated this information from its 

installations and posted it on a web site. Under the legislation before 

Congress, DOD would also be required to promptly notify insurance and 

securities regulators of those individuals included or removed from this 

list. DOD officials have indicated that financial regulators can access the 

information about the actions taken against individuals or companies that 

43S. 418, Sec. 11, and H.R. 458, Sec. 110.
Page 50 GAO-06-23 Financial Product Sales

have violated DOD solicitation policies from the web site and that, if these 

additional requirements become law, they will provide the information on 

their listing to financial regulators as it changes. 

Although DOD is planning to share more information with financial 

regulators, DOD officials remained reluctant to share all information on 

violations of DOD policies that do not result in bans or suspensions. We 

recommended in our June 2005 report that DOD implement a departmentwide searchable database to capture all violations of its own solicitation 

policy and provide this information to financial regulators. However, DOD 

officials told us that violations of some DOD policies, such as when sales 

personnel solicit without an appointment or solicit groups of service 

members, would probably not represent violations of financial regulations 

and therefore would be of little concern to such regulators. DOD officials 

also said that being required to report every time even minor violations 

occur, such as when a retired military member uses military identification 

to obtain base access for a solicitation visit, would be burdensome to their 

personnel. 

However, financial regulators’ staff told us that receiving information 

related to violations of DOD’s commercial solicitation policies also would 

be very helpful in determining whether further action, such as revocation 

of licenses, was warranted. For example, officials from one state insurance 

department told us that insurance agents have the obligation to be 

trustworthy and that if such individuals are violating any DOD regulations, 

this information could help them determine whether the conduct of the 

agents also violate their state’s requirements. 

Although DOD personnel had not routinely shared service member 

complaints with financial regulators in the past, DOD officials have also 

told us that they intend to require their personnel to report more of that 

type of information to regulators. Under the current solicitation policy 

directive, DOD personnel are not required to share information relating to 

service member concerns or complaints with other parties, and the revised 

draft that was published for comment also lacked any provisions relating to 

such information. However, staff in the office that oversees the policy 

directive told us that, as part of addressing the comments they have 

received, they intend to specifically require in the new directive that base 

personnel report to financial regulators any service member concerns or 

complaints that relate to the quality of the financial products offered to 

them or regarding the appropriateness of the practices used to market 

these products. 
Page 51 GAO-06-23 Financial Product Sales

Financial regulators indicated that receiving such information from DOD 

would greatly improve their ability to recognize and act on potentially 

problematic financial product sales involving service members. Insurance 

and securities regulator staff told us that promptly receiving concerns or 

complaints raised by service members would allow their normal regulatory 

oversight processes to function properly, which rely on complaints as an 

important indicator of potential problems involving insurance company or 

broker-dealer practices. 

Congress also may be increasing the amount of information that both 

regulators and DOD have about potentially problematic practices by 

insurance sellers. Both of the bills currently under consideration in 

Congress would prohibit insurers from using agents that sell life insurance 

on military installations unless the insurer has a system to report to the 

state insurance regulators in its state of domicile and in the state of 

residence of an agent any disciplinary actions known to have been taken by 

any government entity and any significant disciplinary action taken by the 

insurer itself against an agent with regard to the agent’s sales on military 

installations.44 Furthermore, the bills would require that state insurance 

regulators develop a system for receiving such information and the ability 

to disseminate it to all states and to DOD. 

However, some barriers appear to make sharing between DOD and 

financial regulators more difficult. As part of conducting their 

investigations of contractual plan sales, securities regulator staff told us 

that personnel at some DOD installations were reluctant to share any 

information involving specific service members for various reasons. 

According to these regulators, the installation personnel cited military 

privacy regulations and the restrictions that arise from attorney-client 

privilege if the service member was being assisted by military legal counsel. 

According to the director of the DOD office responsible for administering 

the solicitation policy, such issues can affect their ability to share 

information with entities outside the military. However, he explained that 

they have researched these issues with their legal staff and believe that 

they can share information that is deemed to be necessary for the official 

needs of the requesting organization, including financial regulators. This 

DOD official also acknowledged that more coordination could be done to 

ensure that both its own military installation personnel and financial 

regulatory staff understand how additional sharing could appropriately 

44S. 418, Sec. 10, and H.R. 458, Sec. 109.
Page 52 GAO-06-23 Financial Product Sales

occur. In addition, to improve financial regulators’ ability to obtain 

information from DOD, officials from NASD told us that the financial 

regulators could create liaisons on their staff to receive complaints and be 

the primary person responsible for seeking information from the military as 

part of examinations. 

Inadequate Financial Literacy 

and Lack of Jurisdictional Clarity 

Are also Concerns 

Although increased financial literacy could also help protect military 

service members from inappropriate financial product sales, concerns 

exist over the adequacy of such efforts to date. In a report on the extent to 

which consumers understand and review their credit reports, we noted that 

individuals’ ability to understand credit matters differed across various 

demographic characteristics. For example, we found that college-educated 

individuals with high incomes and credit experience exhibited more 

expertise than those without such characteristics.45 Similarly, many 

military members also tend to lack advanced education or high incomes. 

As our April 2005 report on the financial condition of military members 

noted, almost 40 percent of service members reported having some trouble 

managing their financial affairs and studies by private consultants have 

found that the overall financial literacy among service members is not 

high.46 

DOD is attempting to increase financial literacy among military members. 

As noted previously, DOD has developed personal financial management 

programs to provide service members with financial literacy training, 

financial counseling, and other assistance to avoid or mitigate the adverse 

effects associated with personal financial problems. However, as we 

reported in April 2005, not all service members were receiving the training 

required as part of these programs. As a result, our report recommended 

that DOD implement a monitoring plan to ensure that all junior enlisted 

members receive the required personal financial management training. 

Similarly, financial regulators have also begun working with DOD to 

increase financial literacy and awareness among service members, but 

these efforts have not been completed. For example, approximately $7 

million of the settlement that SEC and NASD reached with the largest 

broker-dealer selling contractual plans to military members will be used to 

45GAO, Credit Reporting Literacy: Consumers Understood the Basics but Could Benefit 

from Targeted Educational Efforts, GAO-05-223 (Washington, D.C.: Mar. 16, 2005). 

46GAO-05-348.
Page 53 GAO-06-23 Financial Product Sales

fund financial education efforts among service members. Using the 

proceeds of the settlement, NASD staff told us that the staff of the NASD 

Investor Education Foundation plan to conduct research to determine 

current levels of service members’ investment knowledge and use this to 

plan and develop its military education efforts. Among the efforts currently 

being designed are a military-specific online resource center to provide 

unbiased information on saving and investing. In addition, they plan to 

develop training to support the military’s current personal financial 

management program by establishing a coordinated and uniform financial 

education program. They also plan to conduct a public outreach campaign 

to promote saving and investing to members of the military and their 

families. These efforts are anticipated to be publicly launched in late 2005 

with many national and local activities taking place in 2006. 

To help convey information to service members about insurance regulatory 

organizations outside the military that can receive and help resolve their 

complaints, NAIC and DOD staff have also been working together on 

materials to help educate service members. As of October 2005, their 

efforts have produced a consumer brochure for military members that 

contains information to help service members better understand factors to 

consider when purchasing life insurance and regulatory entities that 

service members can contact should they have complaints concerning 

insurance sales. According to NAIC officials, they are also working on 

information to be presented on a NAIC Web site. 

Congress has also recognized the need for additional information to better 

protect military service members from inappropriate product sales. For 

example, both versions of the bill currently under consideration in 

Congress would require that, for any sales taking place on a military 

installation, insurance representatives disclose that subsidized life 

insurance may be available from the government to the service member 

and that the government has not sanctioned, recommended, or encouraged 

the sale of the product being offered.47 In addition, this legislation also 

would require that service members be provided with information about 

where to complain regarding any problems involving an insurance sale on a 

military installation. Specifically, both bills would generally require that, for 

any sales taking place on federal land or facilities located outside the 

United States, insurance sellers provide a disclosure that lists the address 

47S. 418, Sec. 8, and H.R. 458, Sec. 107.
Page 54 GAO-06-23 Financial Product Sales

and phone number where consumer complaints are received by the 

applicable state insurance regulator.48 

Although DOD currently has a program to provide financial literacy 

training to junior personnel, not all levels of the services receive such 

information. Currently, the personal financial management training that the 

various branches offer to service members are provided only to junior 

enlisted members. However, an officer in one branch of the service also 

told us that she and other more senior members of the military are also 

solicited by financial firms and thus having such training, including 

addressing proper procedures for directing concerns or complaints, 

offered to more than just junior personnel would be helpful. 

Another concern over whether military members are adequately protected 

from inappropriate sales stems from uncertainty over financial regulators’ 

jurisdiction on U.S. military installations. Although most of the insurance 

and securities regulators we contacted believed they had jurisdiction over 

the sales of financial products on military installations, some regulators 

expressed uncertainty over their authority to regulate sales on military 

installations, where the federal government may have “legislative 

jurisdiction.”49 For example, regulators from Maryland conducting work on 

a market conduct examination mentioned that they had asked an agent 

from the Federal Bureau of Investigation to accompany them when visiting 

the military installation in case installation personnel questioned the 

insurance regulators’ authority to conduct an investigation on the 

installations. Further, according to a Texas insurance department official, 

he had trouble getting access to complaints information at a military 

installation because installation personnel question his authority to request 

such information. In addition, Georgia officials told us that a military 

installation in their state had an “exclusive federal jurisdiction” designation 

that could potentially present a jurisdictional issue. However, regulators in 

Virginia noted that they have been able to conduct examinations after 

seeking and obtaining written permission from base commanders. As part 

48S. 418, Sec. 8(b)(4), and H.R. 458, Sec. 107(b)(4).

49When used in connection with an area of land, the term “legislative jurisdiction” means the 

authority to legislate and to exercise executive and judicial powers within that area. The 

federal government holds land under varying degrees of legislative jurisdiction, including 

“exclusive” legislative jurisdiction, where the state’s ability to enforce its laws and 

regulations is extremely limited. The type of existing legislative jurisdiction over military 

installations may vary depending on when and how specific tracts of land were acquired. 
Page 55 GAO-06-23 Financial Product Sales

of the work on DOD’s oversight of insurance sales that we reported on in 

June 2005, we surveyed the various state and territorial insurance 

commissioners.50 Of those that responded to the question regarding 

whether they had authority over sales of life insurance on military 

installations, four commissioners indicated that they did not have such 

authority. State insurance regulators also noted they lack jurisdiction over 

sales taking place outside the United States at overseas installations. 

While securities regulators also generally believed they had jurisdiction 

over sales on military installations, they too indicated that greater clarity 

would be beneficial. At least one state securities regulator responded to a 

North American Securities Administrators Association survey that it did 

not have adequate authority over sales taking place on military 

installations. Of the legislation under consideration in the Congress, the bill 

that passed the House of Representatives includes language stating that 

any state law, regulation, or order pertaining to the regulation of insurance 

or securities sales is generally applicable to any such activity conducted on 

Federal land or facilities in the United States and abroad, including military 

installations. The version introduced in the U.S. Senate includes similar 

language but would only apply to insurance sales.51

Conclusions Large numbers of military service members are being targeted by a few 

firms offering products that provide limited benefits unless held for long 

periods, which most military purchasers were failing to do. Thousands of 

service members across the United States and around the world are 

purchasing products from insurance companies that combine insurance 

and savings. Although some service members and their survivors have 

benefited from these products, many have not. Most of the purchasers of 

these products were unmarried individuals with no dependents and thus 

little need for any more coverage than that already provided by the lowcost government insurance service members receive. Instead, they were 

likely attracted to these products for their investment features. However, 

by being tied to expensive life insurance, these products appeared to be a 

poor investment choice for service members because they include 

provisions that allow the accumulated savings to be used to keep the life 

insurance in force if the service member ever stops making payments and 

50GAO 05-696.

51S. 418, Sec. 6(a), and H.R. 458, Sec. 105(a).
Page 56 GAO-06-23 Financial Product Sales

does not request a refund of this savings. 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. The few companies 

that sell these products also have been accused of using inappropriate sales 

practices in the past, have been sanctioned, and are again being 

investigated by numerous federal and state regulatory and law enforcement 

authorities. 

With concerns over potentially inappropriate insurance sales to military 

members being longstanding, the need to take definitive actions to better 

protect service members appears overdue. The legislation that passed the 

House of Representatives and is being considered in the U.S. Senate 

includes various provisions that, based on our work, would appear to 

improve the protections for military members. Some of the provisions of 

these bills are of particular importance. Currently, both would direct 

insurance regulators and DOD to work together to develop measures to 

address sales to military members. Given that many service members were 

obtaining only limited benefits from purchasing these combined insurance 

and savings products, we believe that congressional action that results in 

state regulators undertaking reviews to ensure that only products that 

comply with state insurance regulations, an area in which regulators in 

some states now have developed concerns, is warranted to provide 

protections to military personnel in all U.S. jurisdictions. 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. This 

could also provide protection for service members that are located in 

overseas installations not directly overseen by state regulators. 

Similarly, military members were also being widely marketed a securities 

product—the contractual plan—that has largely disappeared from the 

civilian marketplace. Although potentially providing returns equivalent to 

other products if steady investments are made over the required 15-year 

term, these products were likely less beneficial to the many service 

members that failed to make payments for that extended length of time. In 

the many years since contractual plans were first offered, a variety of 

alternative investments have become widely available for individuals with 

modest incomes, including other load funds, no-load funds, and TSP, which 

is now available to service members and likely offers the lowest investment 
Page 57 GAO-06-23 Financial Product Sales

expenses of any product. Given the longstanding history of sales practices 

abuses associated with the contractual plans and the availability of viable 

alternative investments, we believe that congressional approval of the 

legislation currently under consideration, which includes language to ban 

these products, would remove products that appear to have little need to 

continue to exist. 

Although insurance and securities regulators have taken actions since 

allegations of inappropriate sales to military members have come to light, 

additional actions could mitigate some of the limitations that hampered 

regulators’ ability to address these problems. As our work found, state 

insurance and securities regulators sometimes were uncertain of the 

adequacy of their authority over sales taking place on military installations. 

As a result, some of these regulators and officials from associations 

representing state insurance and securities regulators expressed support 

for congressional action to clarify that state financial regulators have 

jurisdiction over sales taking place in such locations. 

In addition, congressional action could serve to better ensure that financial 

regulators are made aware of potentially inappropriate sales involving 

military members. As we found, federal and state insurance regulators’ 

ability to more promptly identify inappropriate sales of financial products 

involving military members was hampered by the lack of information 

sharing by DOD. DOD officials have expressed their willingness to provide 

financial regulators with information on actions taken against individuals 

or firms that violate DOD’s solicitation policies. They have also indicated 

their intention to require their personnel to provide information regarding 

service member complaints and concerns. However, they note that privacy 

requirements can pose perceived barriers to such sharing. In addition, they 

remain reluctant to share information about all instances in which sellers 

of financial products violate DOD solicitation policies. However, such 

information could allow financial regulators to determine whether such 

situations also represent potential violations of federal or state laws. As a 

result, we believe that congressionally-mandated direction is needed to 

ensure that DOD identifies ways to overcome these barriers and 

coordinates with its installation personnel and with financial regulators 

about ways to share additional information about problematic company 

behavior and service member concerns. 

Additional DOD actions also could help protect service members from 

firms using unscrupulous sales practices. DOD officials have indicated that 

having their personnel share some information relating to service member 
Page 58 GAO-06-23 Financial Product Sales

concerns and complaints is appropriate. Including such a requirement in 

the revision of DOD’s solicitation policy would better ensure that financial 

regulators receive this important information. DOD is also currently 

attempting to provide personal financial management training to improve 

financial literacy and competence among military members. Such training 

would also appear to be a useful forum for informing military personnel 

about proper procedures for submitting concerns or complaints. Given that 

more senior officers were customers of some of the financial firms that 

target military members, periodically providing such training to service 

members at all levels throughout the military would also likely raise 

awareness and assist them in making sound financial decisions. 

Financial regulators also appear to have opportunities to improve their 

ability to protect military members from inappropriate sales. Because 

complaint information is a critical input to their regulatory processes, 

proactively seeking such information from DOD and its installations would 

likely improve regulators’ oversight efforts. Given the uniqueness of the 

military environment, having staff or offices within regulators’ own 

organizations that serve as liaisons with DOD and individual installations 

could allow both DOD and financial regulators to build trust and gain 

experience in sharing information and assisting investigations of 

potentially problematic financial product sales. Ensuring that financial 

regulators’ staff also make use of any listings compiled by DOD of 

individuals or firms that have been sanctioned by the military for activities 

relating to financial product sales to target examination and investigation 

resources would also likely improve the protections that are afforded to 

military members. 

SEC and NASD efforts to oversee broker-dealers marketing contractual 

plan mutual funds were hampered by a lack of standardized data at these 

firms on the success of clients in investing in these plans. In the event that 

such plans continue to be legally sold, having these regulators evaluate 

how best to ensure they will have such information in the future would 

improve their ability to oversee these products. Some possible ways to 

ensure such information is readily available would be to implement a rule 

requiring broker-dealers to maintain standardized records that show how 

successfully their customers are completing any contractual plans 

purchased. Alternatively, SEC and NASD examiners could routinely request 

such information prior to conducting a review of the broker-dealers selling 

these products. 
Page 59 GAO-06-23 Financial Product Sales

Matters for 

Congressional 

Consideration

To better protect military service members from financial products with 

limited benefits to them, the Congress should consider taking the following 

five actions:

• Provide that products being marketed primarily to military members are 

reviewed by state insurance commissioners to ensure that all such 

product provisions are in compliance with existing state laws, and 

provide for reports through NAIC to relevant congressional committees 

on the results of these reviews within 12 months. 

• Provide that state insurance commissioners work cooperatively with 

DOD to develop appropriateness or suitability standards for sales to 

military service members.

• Ban the sale of contractual mutual fund plans. 

• Specify that state insurance and securities regulators have full access to 

persons and information necessary to oversee sales taking place on 

military installations or involving service personnel. 

• Require DOD to work cooperatively with financial regulators to develop 

mechanisms that overcome existing barriers to sharing information 

about insurance and securities firm activities and service member 

concerns and complaints that can allow financial regulators to 

determine whether violations of existing federal or state laws or 

regulations are occurring.

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.

• Include in the personal financial management training for all service 

members information and materials developed in conjunction with 

insurance and securities regulators that explains how and to whom 

service members should raise concerns or complaints about potentially 

inappropriate sales of financial products, including providing the 
Page 60 GAO-06-23 Financial Product Sales

information necessary for contacting these regulators. Such training 

should also periodically be offered to service members of all levels. 

To better ensure that federal, state, and other financial regulators can 

oversee sales of insurance and securities products to military members, the 

heads of SEC, NASD, and state insurance and securities regulators should 

designate staff to receive complaints from DOD and conduct outreach with 

DOD headquarters and individual installations to proactively learn of issues 

or concerns regarding product sales.

These staff should also make use of any listings that DOD maintains of 

individuals or firms that have been sanctioned by the military for improper 

solicitation practices. 

In the event that contractual mutual funds are not banned, the Chairman of 

SEC and the Chairman of NASD should consider various means of better 

assuring that their staff has adequate information to assess the sales of 

contractual plans. 

Agency Comments We provided a draft of this report to DOD, NAIC, NASD, and SEC for 

comments. Each of these organizations provided written comments 

expressing general agreement with our report and its recommendations 

(these comments appear in appendixes IV through VII). In concurring with 

our recommendation that DOD require that information on service member 

complaints be provided to financial regulators, a letter from DOD’s acting 

principal deputy for the Undersecretary for Personnel and Readiness 

indicated that their revised solicitation directive will require installations to 

report such information to regulators. The principal deputy’s letter also 

indicates they concur with our recommendation to provide all service 

members with information during personal financial management training 

on how to complain to regulators and states that they have developed a 

strategic plan for programs to assist members with determining 

appropriate financial products for their needs and how to remedy concerns 

or complaints. They also intend to approach state regulatory agencies to 

assist in providing educational information to all service members and 

provide such information during new comer orientations and through tollfree assistance lines. 

In SEC’s letter, the director of that agency’s Office of Compliance 

Inspections and Examinations stated that they shared our concerns that 

securities products be properly marketed to military members. She also 
Page 61 GAO-06-23 Financial Product Sales

stated that in the event that Congress does not ban the sale of contractual 

plans they will consider our recommendation that SEC consider ways to 

ensure that it have adequate information to assess sales of such products. 

In NASD’s letter, the NASD Chairman and Chief Executive Officer states 

that men and women of the U.S. armed forces deserve the same protection 

from inappropriate financial product sales as their civilian counterparts 

and that our report will help NASD and others to ensure that this is 

achieved. NASD’s letter also describes the actions the organization has 

taken against the largest seller of contractual plans, including noting, as our 

report acknowledged, that they began reviewing this firm in 2003. NASD’s 

letter also describes their efforts to develop education for military 

members.

In its letter, NAIC’s Executive Vice President and Chief Executive Officer 

notes that we ask Congress to direct the states to review currently 

approved products being marketed to military members. In response, she 

indicates that a number of states are examining companies that have 

engaged in questionable practices involving these products and that an 

NAIC committee plans to review life insurance sold with a side fund to 

recommend a position on products being offered in the marketplace in 

2006. Regarding our request that Congress direct DOD and the insurance 

regulators to work together to improve information sharing, NAIC’s letter 

indicates that they are in the process of; 

• compiling a list of insurance department contacts to ensure that DOD 

has the proper contact information for further state assistance; 

• updating NAIC's Complaint Database System form to identify 

complaints that are submitted by military personnel; and 

• providing DOD with a state-by-state premium volume summary for 

those companies that state insurance regulators know are soliciting or 

have solicited insurance products on military bases.

Regarding our recommendation that DOD and regulators work together to 

develop training materials, NAIC’s letter indicates that they have worked 

with DOD to develop a consumer brochure and a Web site specifically 

addressing life insurance information for military personnel and remain 

committed to developing other materials to fill any financial literacy needs 

that DOD identifies. 
Page 62 GAO-06-23 Financial Product Sales

We also received technical comments from each of these organizations that 

we incorporated where appropriate. 

As agreed with your offices, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days after the 

date of this report. At that time, we will send copies of this report to the 

Chairman and Ranking Minority Member, Senate Committee on Armed 

Services; Chairman and Ranking Minority Member, House Committee on 

Armed Services; and Chairman and Ranking Minority Member, House 

Committee on Financial Services. We will also send copies of this report to 

the Secretary of Defense, Chairman, SEC; and Chairman, NASD. We will 

also make copies available to others upon request. In addition, the report 

will be available at no charge on GAO’s Web site at http://www.gao.gov. 

If you or your staff have any questions regarding this report, please contact 

me at (202) 512-8678 or hillmanr@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. Key contributors to this report are listed in appendix VIII.

Richard J. Hillman

Managing Director, Financial Markets 

and Community Investment
Page 63 GAO-06-23 Financial Product Sales

Appendix I

Objectives, Scope, and Methodology ApApenednxidexiIs

To identify the insurance products being sold and how these were being 

marketed to military members, we reviewed prior Department of Defense 

(DOD) reports, spoke to officials at the National Association of Insurance 

Commissioners (NAIC), and met with regulatory officials from several 

state regulators that are currently conducting or have previously conducted 

reviews of insurance companies that market primarily to military members. 

This work included interviewing regulatory officials and reviewing 

available documentation from the Georgia Insurance and Safety Fire 

Commissioner, the Texas Department of Insurance, the Florida Office of 

Insurance Regulation, and the Illinois Department of Insurance, and the 

Virginia State Corporation Commission Bureau of Insurance. In addition, 

we contacted staff from the Maryland Insurance Administration and the 

Washington Office of the Insurance Commissioner to discuss their past 

investigations of certain insurance companies targeting junior enlisted 

service members and reviewed documents pertaining to such 

investigations. We also visited Fort Benning, Georgia, and Great Lakes 

Naval Training Center, Illinois, to better understand the insurance 

solicitation issues present at two large military training installations. 

During these site visits we interviewed staff judge advocate personnel and 

reviewed documents pertaining to current and past investigations of sales 

of insurance products at these locations. Furthermore, we obtained data 

on the characteristics of military members making allotments to three 

different insurance companies in this market from DOD’s Defense Finance 

and Accounting Service (DFAS), which maintains military personnel pay 

records. In our prior report, we were unable to reliably determine the total 

number of service members who have allotments for supplemental life 

insurance products or the number of dollars that service members pay to 

life insurance companies through the DFAS systems because not all 

allotments for insurance were identified as such. To provide accurate 

information for this report, we instead obtained from DFAS the dependent 

status of service members for allotments that were being routed to specific 

banks being used by some of the insurance companies that market 

primarily to military members, which produced results that we did believe 

were sufficiently reliable to highlight that a significant percentage of 

service members who had made allotments to specific companies had no 

dependents. Further, we contacted officials from the six insurance 

companies identified by the multistate investigation as being those 

companies that primarily market to service members, and reviewed their 

marketing materials for the product sold to service members. 
Appendix I

Objectives, Scope, and Methodology

Page 64 GAO-06-23 Financial Product Sales

To illustrate the cost and the possible performance of sample insurance 

policies offered by these companies we obtained and analyzed sample 

policies for a junior enlisted service member from six companies. We also 

compared the cost and performance of these products to other products 

offered to service members by the government including Servicemembers’ 

Group Life Insurance (SGLI), Veterans’ Group Life Insurance (VGLI), and 

the Thrift Savings Plan (TSP), as well as insurance products offered by a 

private insurance company. We chose the TSP G Fund as the savings 

component to be coupled with the government-offered insurance because 

of its low risk and its comparable return rate to the minimum rates claimed 

by the insurance companies. We assumed a 4 percent rate of return for all

of our analysis based on the guarantee rate claimed on the policies typically 

marketed to service members by the six companies we reviewed. For 

approximating the projected TSP return, we compounded the 4 percent 

rate on a monthly basis. To project the return on the insurance products’

savings components, we used the method of crediting interest in the 

products’ terms, in which interest is credited on the lesser of the average 

balance during the year or the year-end balance. We also conducted 

analysis to illustrate the performance of the products after a service 

member stops making payments at the end of the fourth policy year. 

Further, the analyses we conducted are for illustrative purposes only and 

do not necessarily depict actual policy, plan schedules, or are adjusted 

according to various proprietary risk classes that could apply for a 

particular individual. 

To identify the securities products being sold and how these were being 

marketed to military members, we interviewed staff from NASD (formerly 

called the National Association of Securities Dealers), Securities and 

Exchange Commission (SEC), and North American Securities 

Administrators Association (NASAA).1

 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 determine the cost and 

performance of the contractual plan product offered by this broker-dealer 

firm, we conducted analysis to illustrate a contractual plan product 

typically marketed to career service members using a $600 front-end load. 

1

NASAA is a voluntary association representing 67 state, provincial, and territorial securities 

administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, 

Canada, and Mexico. 
Appendix I

Objectives, Scope, and Methodology

Page 65 GAO-06-23 Financial Product Sales

To illustrate how this product compared to other similar products we 

analyzed the cost and performance of a typical fund using the Investment 

Company Institute recommended 5 percent load and TSP C Fund with no 

load. We chose the TSP C Fund because it invests in common stocks and 

was therefore comparable to the contractual plan product. We analyzed 

these products for a 15 year--or “full term”--period. We assumed a 7 percent

annual return that we compounded monthly for all products. Further, we 

reviewed SEC and NASD investigation files of the sales of securities 

products to military 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. We also reviewed available 

materials pertaining to product approval, investigations, and regulatory 

activities and actions involving firms marketing to military members. 

Specifically, to assess how insurance regulators were overseeing sales of 

insurance products to military service members, we interviewed officials 

from NAIC, including the staff working on the multistate investigation of 

insurance sales involving service members. We also spoke with officials 

and reviewed available documents on activities and actions from several 

state insurance departments, including those in Florida, Georgia, Illinois, 

Maryland, Texas, and the state of Washington, that have previously 

investigated, or are currently investigating, companies targeting military 

members. Further, we reviewed legal actions taken against certain 

insurance companies as part of Department of Justice (DOJ) investigations 

and law suit cases. 

To determine the extent to which state insurance regulators received 

complaints from military service members or had any concerns about their 

jurisdiction on military installations, we relied on an E-mail survey to the 

insurance commissioners for the 50 states, the District of Columbia, and 

four territories: American Samoa, Guam, Puerto Rico, and the Virgin 

Islands administered as part of our June 2005 report.2

 We received 

completed surveys from 46 states, the District of Columbia, and one U.S. 

Territory, yielding an overall response rate of 87 percent. Further, to make 

the same determination in regards to the sales of securities products to 

military members, we relied on the results of a survey administered by 

NASAA. Additionally, we contacted DOD officials, conducted fieldwork at

Fort Benning, Georgia and Naval Station Great Lakes, Illinois—two large 

2

See GAO-05-696.
Appendix I

Objectives, Scope, and Methodology

Page 66 GAO-06-23 Financial Product Sales

military training installations--and reviewed findings from other recent 

work concerning supplemental life insurance sales conducted at several 

other military installations throughout the country. 

We performed our work from November 2004 to October 2005 in 

accordance with generally accepted government auditing standards.
Page 67 GAO-06-23 Financial Product Sales

Appendix II

Actions Taken Against Financial Companies 

that Have Frequently Marketed to Military 

Members ApendxiI

Table 2 summarizes various actions that we identified during the course of 

our review that have been taken by regulators or others against companies 

that were identified as primarily marketing products to military members. 

As indicated, many of the actions were settlements in which the companies 

did not admit to any wrongdoing. 

Table 1: Regulatory Actions or Activities Involving Companies that Have Frequently Marketed to Military Members

Entity taking action Alleged violations Resulting actions

Virginia State Corporation 

Commission Bureau of 

Insurance 

September 2005

Cease and Desist 

Settlement Order, Case 

No. INS-2005-00211, 

Sept. 29, 2005

The regulatory forms for three insurance 

companies’ combined insurance and savings 

product allegedly failed to comply with the state’s 

insurance nonforfeiture laws.

The companies agreed to stop marketing or

soliciting the particular products which failed to comply. 

Georgia Commissioner of 

Insurance 

May 2005

Commissioner of 

Insurance Press Release, 

May 25, 2005

An insurance company was investigated when 

allegations surfaced that certain agents violated 

various DOD and state insurance regulations by 

identifying themselves as disinterested financial 

advisors while selling policies to soldiers in 

training.

The company agreed to refund about $1.1 million in 

premiums to soldiers who were solicited and sold term 

life insurance policies while they were training at two 

Army bases in Georgia. 

Georgia Commissioner of 

Insurance

January 2005

Commissioner of 

Insurance Press Release, 

January 7, 2005

An insurance company was investigated when 

allegations surfaced that certain agents violated 

various DOD and state insurance regulations by 

identifying themselves as disinterested financial 

advisors while selling policies to soldiers in 

training.

The company agreed to issue refunds totaling about 

$1.3 million to certain soldiers at an Army base in 

Georgia.

U.S. Securities and 

Exchange Commission 

and NASD

December 2004

SEC Administrative 

Proceeding File No. 3-

11770, December 15, 

2004

NASD News Release, 

December 15, 2004

A broker-dealer allegedly:

• offered and sold contractual plans by, in part, 

making misleading statements and omissions;

• violated NASD rules when one of the company’s 

supervisors inappropriately confronted a former 

customer who had made negative comments 

about the company; and

• violated requirements to maintain books and 

records in connection with the retention and 

accessibility of certain E-mail communications.

Without admitting any wrongdoing, the firm agreed to:

• accept a censure from NASD; 

• pay a fine of $12 million, including about $4 million for 

customer restitution and about $8 million for an 

investor education program for members of the U.S. 

military and their families; and

• hire an independent consultant to oversee the 

payment of restitution and review its sales practices. 
Appendix II

Actions Taken Against Financial Companies 

that Have Frequently Marketed to Military 

Members

Page 68 GAO-06-23 Financial Product Sales

Washington Office of 

Insurance Commissioner

October 2004

Office of Insurance 

Commissioner Letter, 

October 21, 2004 

The regulatory forms for four insurance 

companies’ combined insurance and savings 

products allegedly failed to comply with the state’s 

insurance laws.

As a result of the withdrawal of approval of the forms, 

these companies’ products could no longer be sold in 

the state of Washington.

Department of Justice

December 2002

DOJ Press Release, 

December 19, 2002

The government alleged that an insurance 

company engaged in a scheme to defraud 

military members who purchased life insurance 

policies from the company between 1991 and 

1998.

The company agreed to settle the claims without 

admitting liability under the terms of a settlement 

agreement that the company:

• pay a $1 million civil penalty;

• pay the U.S. $505,965 to cover the costs of its 

investigation;

• increase the face amount of all in-force coverage by 

6.5%, for a total in-force increase in death benefits 

coverage of approximately $160 million; 

• pay $2.7 million to all policyholders who canceled their 

policies during the relevant time period; and

• never again sell another insurance policy or reapply to 

DOD for permission to conduct business on military 

installations.

Maryland Insurance 

Administration 

(Commissioner)

January 2001

Insurance Administration 

Market Conduct 

Examination Report No. 

490-01, January 25, 2002

Maryland Insurance 

Administration Consent 

Order, Case No. MIA-360-

7/00 (January 7, 2001)

The agents for one insurance company

allegedly:

• did not disclose to military personnel that the 

products being sold were insurance;

• did not disclose to military personnel that they 

were insurance agents; and

• misrepresented the product sold as something 

other than insurance.

The company generally disputed the allegations but 

voluntarily agreed to, among other things:

• submit to the Commissioner the policies and 

procedures material for approval;

• distribute the approved policies and procedures 

manual to its Maryland agency force; and 

• pay an administrative penalty to the state of Maryland 

in the amount of $100,000, with $50,000 suspended.

(Continued From Previous Page)

Entity taking action Alleged violations Resulting actions
Appendix II

Actions Taken Against Financial Companies 

that Have Frequently Marketed to Military 

Members

Page 69 GAO-06-23 Financial Product Sales

Florida Department of 

Insurance 

February 2000

Florida Department of 

Insurance Consent Order, 

Case No. 23227-97-CO, 

February 17, 2000

Florida Department of 

Insurance Letter, April 5, 

2000

Two insurance companies allegedly:

• failed to provide their customers with Buyers 

Guides and Policy Summaries;

• failed to properly refund or escheat significant 

amounts of funds misdirected to the companies 

from the pay of military service members; and

• improperly made unilateral reinstatements of 

lapsed policies. 

The companies generally denied the allegations but 

each voluntarily agreed to:

• look for and refund certain military members military 

pay allotments received by the companies;

• set up and run a special Complaint and Alternative 

Dispute Resolution Program; 

• make a mandatory payment of $200,000 to cover the 

costs of the investigation; and

• contribute a gift of $1 million to a Florida university.

Department of Justice

December 1998

Complaint, U.S. Dist. Ct., 

W.D. Wa., Case No. C98-

5211(Apr. 21, 1998)

Settlement Order, U.S. 

Dist. Ct., W.D. Wa., Case 

No. C98-5211RJB (Dec. 7, 

1998)

The government alleged that two insurance 

companies:

• committed mail and wire fraud;

• made false statements; and

• conspired to defraud the United States.

The companies denied the allegations but agreed to: 

• not sell or market the life insurance product other than 

as life insurance;

• abide by and observe all DOD directives and military 

regulations related to commercial solicitation on 

military installations; 

• conclude a comprehensive and final accounting of all 

funds paid to the companies in error, and provide a 

copy to the United States; 

• offer refunds of any unallocated moneys to payers who 

can be located through the exercise of due diligence; 

and 

• refund the full amount of all premiums paid by 215 

specific individuals who requested a refund.

Washington Office of 

Insurance Commissioner

June 1997

Office of Insurance 

Commissioner Letter, June 

10, 1997 

The product of an insurance company allegedly 

did not comply with the state’s insurance laws.

Withdrew approval to sell the policies within the state of 

Washington.

(Continued From Previous Page)

Entity taking action Alleged violations Resulting actions
Appendix II

Actions Taken Against Financial Companies 

that Have Frequently Marketed to Military 

Members

Page 70 GAO-06-23 Financial Product Sales

Source: GAO analysis.

United States Court of 

Appeals, Ninth Circuit

February 1997

108 F.3d 1123, (9th Cir. 

1997)

Private claimants alleged that an insurance 

company violated the Racketeer Influenced and 

Corrupt Organizations Act (RICO) and committed 

fraud, and misrepresentation to facilitate sales of 

insurance as part of a tax avoidance scheme. 

Appeals court affirmed jury verdict that the firm was 

liable for conspiracy to violate a provision of RICO in 

connection with a tax avoidance scheme. The jury 

awarded the plaintiffs:

• $259,366 in actual damages (which were trebled 

pursuant to RICO);

• $87,000 in damages for fraud and negligent 

misrepresentation; and

• $500,000 in punitive damages under state law. 

(Continued From Previous Page)

Entity taking action Alleged violations Resulting actions
Page 71 GAO-06-23 Financial Product Sales

Appendix III

Performance of Contractual Plans Compared 

to Alternative Investments ApendxiI

Because of the structure of their sales charges, contractual plans are not 

likely to offer superior returns to a long-term investor compared to other 

alternative products. Table 1 illustrates that investing $100 per month for 15 

years in a contractual mutual fund plan that earns a 7 percent return would 

result in an account worth less than one in a conventional mutual fund with 

a 5 percent sales load in which the same payments were made and the same 

projected return was earned. As shown in the table, the amount that would 

be accumulated in a contractual plan does not exceed that of a 

conventional mutual fund until after 16 years. The contractual plan’s 

accumulated value lags behind the conventional fund because its high upfront sales charge reduces the amount of money that is invested and 

available to earn the return of the underlying mutual fund from the 

beginning. In contrast, investing $100 monthly in TSP and earning a 7 

percent return would result in an account worth $1,600 more than that 

accumulated in the contractual plan after 15 years.1

 

1

For projected return rates of below 7 percent, the amount earned on the contractual fund 

plan would exceed that of the regular 5 percent load fund sooner, but for returns of greater 

than 7 percent, the contractual plan would require more than 15 years to exceed the 5 

percent load fund’s accumulated amount. Because TSP does not charge sales charges, its 

accumulated amounts would always exceed those of the other two investments by 

increasingly larger increments as the projected return rates are increased. We used TSP C 

Fund for this calculation because it invests in common stocks and was therefore 

comparable to the contractual plan product.
Appendix III

Performance of Contractual Plans Compared 

to Alternative Investments

Page 72 GAO-06-23 Financial Product Sales

Table 2: Investment Performance of a $100 Monthly Contribution into a Contractual Plan, Conventional Mutual Fund, and TSP C 

Fund, Assuming Each Earns a 7 Percent Return

Source: GAO analysis. 

Note: If the conventional mutual fund offers breakpoints, which are discounts on the sales loads to 

investors who invest certain amounts of money such as investments over $25,000, the investor would 

earn even more with a conventional load fund due to lower sales charges for investments of that 

amount.

As table 1 also shows, investors that terminate their periodic investments 

earlier than the full 15 years are even more likely to be better off with a 

conventional mutual fund or TSP. For example, an investor ceasing 

payments after 4 years in the contractual plan would have an account 

worth about $4,785. However, after 4 years, the account of the conventional 

mutual fund would be worth almost $5,275 and the TSP account would be 

worth about $5,553.

Payment contributions

Contractual Plan

(50% load)

Conventional mutual fund (5% 

load)

Thrift Savings Plan C Fund

(No load)

Policy 

year

Yearly

payments Sales load Total value Sales load Total value Sales load Total value

1 $1,200.00 $600.00 $623.24 $60.00 $1,184.16 $0.00 $1,246.49

2 1,200.00 0.00 1,914.79 60.00 2,453.93 0.00 2,583.08

3 1,200.00 0.00 3,299.69 60.00 3,815.49 0.00 4,016.30

4 1,200.00 0.00 4,784.72 60.00 5,275.47 0.00 5,553.13

5 1,200.00 0.00 6,377.09 60.00 6,841.00 0.00 7,201.05

6 1,200.00 0.00 8,084.58 60.00 8,519.70 0.00 8,968.10

7 1,200.00 0.00 9,915.50 60.00 10,319.75 0.00 10,862.90

8 1,200.00 0.00 11,878.78 60.00 12,249.93 0.00 12,894.66

9 1,200.00 0.00 13,983.99 60.00 14,319.64 0.00 15,073.31

10 1,200.00 0.00 16,241.38 60.00 16,538.97 0.00 17,409.45

11 1,200.00 0.00 18,661.96 60.00 18,918.74 0.00 19,914.46

12 1,200.00 0.00 21,257.52 60.00 21,470.54 0.00 22,600.57

13 1,200.00 0.00 24,040.71 60.00 24,206.81 0.00 25,480.86

14 1,200.00 0.00 27,025.11 60.00 27,140.89 0.00 28,569.36

15 1,200.00 0.00 30,225.24 60.00 30,287.07 0.00 31,881.12

16 1,200.00 0.00 33,656.71 60.00 33,660.69 0.00 35,432.30

17 1,200.00 0.00 37,336.25 60.00 37,278.18 0.00 39,240.19

18 1,200.00 0.00 41,281.77 60.00 41,157.19 0.00 43,323.36

19 1,200.00 0.00 45,512.52 60.00 45,316.61 0.00 47,701.69

20 1,200.00 0.00 50,049.12 60.00 49,776.71 0.00 52,396.54
Page 73 GAO-06-23 Financial Product Sales

Appendix IV

Jurisdictions in Which at Least One of the Six 

Insurance Companies That Target Military 

Members Were Licensed to Sell Insurance ApendxiIV

Source: NAIC data. 

Alabama Missouri

Alaska Montana

Arizona Nebraska

Arkansas Nevada

California New Jersey

Colorado New Mexico

Connecticut North Carolina

Delaware North Dakota

District of Columbia Ohio

Florida Oklahoma

Georgia Oregon

Hawaii Pennsylvania

Idaho Rhode Island

Illinois South Carolina

Indiana South Dakota

Iowa Tennessee

Kansas Texas

Kentucky Utah

Louisiana Virginia

Maryland Washington

Massachusetts West Virginia

Michigan Wisconsin

Minnesota Wyoming

Mississippi
Page 74 GAO-06-23 Financial Product Sales

Appendix V

Comments from the Department of Defense ApendxiV
Appendix V

Comments from the Department of Defense

Page 75 GAO-06-23 Financial Product Sales
Appendix V

Comments from the Department of Defense

Page 76 GAO-06-23 Financial Product Sales
Page 77 GAO-06-23 Financial Product Sales

Appendix VI

Comments from the Securities and Exchange 

Commission ApendxiVI
Page 78 GAO-06-23 Financial Product Sales

Appendix VII

Comments from NASD (Formerly Called the 

National Association of Securities Dealers) ApendxiVI
Appendix VII

Comments from NASD (Formerly Called the 

National Association of Securities Dealers)

Page 79 GAO-06-23 Financial Product Sales
Appendix VII

Comments from NASD (Formerly Called the 

National Association of Securities Dealers)

Page 80 GAO-06-23 Financial Product Sales
Page 81 GAO-06-23 Financial Product Sales

Appendix VIII

Comments from the National Association of 

Insurance Commissioners ApendxiVI
Appendix VIII

Comments from the National Association of 

Insurance Commissioners

Page 82 GAO-06-23 Financial Product Sales
Page 83 GAO-06-23 Financial Product Sales

Appendix IX

GAO Contact and Staff Acknowledgments ApendxiIX

GAO Contact Richard J. Hillman (202) 512-8678

Staff 

Acknowledgments

In addition to the individual above, Cody Goebel, Assistant Director; 

Joseph Applebaum; Gwenetta Blackwell-Greer; Tania Calhoun; Rudy 

Chatlos; Lawrence Cluff; Barry Kirby; Marc Molino; Josephine Perez; David 

Pittman; and Amber Yancey-Carroll made key contributions to this report.

(250166)
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