> Alistair Barr is a reporter for MarketWatch in San Francisco.

SAN FRANCISCO (MarketWatch) — Life insurers are facing a barrage of investigations and criticism over the way the industry pays death benefits for veterans and other federal employees. But some analysts think it’s a lot of fuss about nothing.

The industry is being investigated after Bloomberg Markets magazine analysts at FBR Capital Markets, questioned the outcry on Thursday.

“We find the very sharp and rapid regulatory response to this surprising and apparently unfounded,” they wrote in a note to investors.

Accounts that life insurers offer to set up for beneficiaries are a long-established product feature that is optional for consumers, who can choose to take a lump sum in cash instead, the analysts said.

In fact, the practice is the essence of what insurers do everyday, they added.

“Investing funds ultimately due to customers in the general account to earn a spread over what is paid out quite simply describes the business of insurance,” Binner and Barker wrote.

Investors seemed to agree. Prudential shares rose 1.5% to $56.25, while MetLife gained 3.1% to $40.49 in afternoon trading Thursday.

Still, the FBR analysts warned that the regulatory response could create more “headline risk,” for the life insurance sector.

“Given House Veterans Affairs Committee Chairman Filner’s comments, we think hearings on this in the House and Senate Veteran’s affairs committees are a risk,” the analysts wrote.

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LOAD-DATE: July 30, 2010