Senator Charles Schumer speaks at the NAACP's Centennial Convention, in New York, July 12, 2009. REUTERS/Chip East

NEW YORK (Reuters) - Senator Charles Schumer said on Sunday he was drafting legislation that would require government agencies to guarantee that families of deceased soldiers and other federal workers receive lump-sum payments of insurance death benefits.

At issue is whether life insurers that contract with the Department of Veterans Affairs and the Office of Personnel Management keep death benefits in potentially risky accounts and pay low yields to the survivors, rather than pay out lump sums upon the deaths of the policyholders.

Currently beneficiaries receive a checkbook, with funds held in an account at the insurance company that they can access by writing a check.

Schumer cited reports that have said the checks written by beneficiaries were merely IOUs from the insurance company that when presented to merchants were sometimes rejected.

The accounts, which are held within the insurance giants’ corporate accounts and earn interest for the companies, are also not FDIC insured, Schumer noted.

New York Attorney General Andrew Cuomo has subpoenaed eight insurers in a state investigation into whether life insurance companies had defrauded families of deceased members of the military. Among the companies subpoenaed were MetLife Inc and Prudential Financial Inc, Cuomo said.

“The last thing that family members and loved ones of our soldiers should be worried about is whether the funds they expect to collect from a life insurance policy will be there when they need them,” Schumer, a New York Democrat, said in a news release.

“It’s deeply troubling that insurance companies would promote these accounts as if they were run-of-the-mill checking accounts, yet the insurance companies profit from the interest, and provide no FDIC guarantee that the money itself is insured.”

Schumer said his bill would require all insurance companies contracting with Veterans Affairs and the OPM to offer a lump-sum payout as the default payment mechanism, unless a beneficiary actively chose to keep the funds in a company-held account.