Were those New York gumshoes targeting the phony “retirement plans” (actually, life-insurance policies) that some agents for Metropolitan Life got caught hustling to nurses? Or the similar scam for selling variable-life policies, touted over Christian radio stations by an agent for the Equitable Life Assurance Society (one reason Equitable recently paid a $1.5 million fine)? Or the pending lawsuits against Crown Life for allegedly misrepresenting policies
Nope. In a report as fresh today as it was then, a 1905 commission led by state Sen. William Armstrong called for curbs on a brazen industry that had forgotten how to blush. New York and other states passed some strong and useful laws-but public oversight never achieved that peak again. In 1945, the industry talked Congress into passing the McCarran-Ferguson Act, which effectively freed life insurers from most federal regulation. State regulation is sometimes tough but usually flaccid. No other financial institution has so little restraint on deceptive sales.
So it’s time for another Armstrong Commission, not just to plumb the guile of agents but to grill the executives who reward it. Reform could save the public millions of dollars, as well as serve the competitive interests of insurers who play fair.
The usefulness of life insurance isn’t in question, especially for workers with families to support. Term insurance coveys you if you die and costs you the least in premiums. Cash-value insurance, which requires higher payments, combines death protection with various types of investment accounts. If you keep such a policy for 15 to 20 years, its investments will probably grow as much as those in comparable outside accounts. If you drop it, however, it’s often money down the drain–and more than half of the buyers of whole-life policies drop their coverage within 10 years.
For insurance agents, big cash-value policies are the Grail. All of your first-year premium is typically split between the agent and his or her superiors. For the next nine years, they usually take another 6 percent to 12 percent. That makes it hard for your investment to progress. A handful of insurers sell low-load (low-commission) policies by phone, among them Ameritas in Lincoln, Neb., and USAA in San Antonio. Their cash values grow faster than agent-sold policies during your investment’s early years. But owning insurance is often an emotional issue, not a rational one. That’s why most buyers wait for agents to move them rather than dial for coverage themselves. Among the stratagems that the industry tolerates:
You might hear from a churner if you’ve built up a lot of cash in Your policy, or if you own a tax-deferred annuity. You’ll be urged to use that money to buy more insurance or to switch to a policy said to pay a higher yield. Too late, you discover that the agent is paid out of Your cash values, which depletes your investment funds.
Just ask Joyce and John Wills of Pittsburgh, who had been paying $50 a month for $155,000 worth of coverage from MetLife. Their agent told them they could have an extra $32,639 policy free, Joyce says. So they signed up. Some time lately, however, they learned that (1) their $50 a month was paying the “free” policy’s premiums; (2) the premiums for their older insurance were being withdrawn from those policies’ cash values; (3) over time, those policies would have crashed, leaving no insurance savings and no $155,000 death benefit.
After two years of correspondence and complaints, the Willses made an appointment with a lawyer, at which point, Joyce says, the company undid the transaction. Pennsylvania’s insurance commission is investigating alleged churning by MetLife. Nine agents and executives have been fired or resigned, MetLife says, including the one who deceived the Willses. The company declines any further comment until the inquiry is over.
Once you’ve paid a cashvalue policy’s upfront costs, it almost always makes more sense to keep it than to switch. It should pay higher future returns than a policy you start from scratch. To discover any policy’s true yield, consult actuary Jim Hunt of the National Insurance Consumer Organization, Box 15492, Alexandria, Va. 22309. He’ll need the illustration, if the policy is new; if the policy is older, send a current projection of its future values (ask the company to run it for you). Cost: $40 to check one policy and 830 each for others sent with the same letter. include a self-addressed business envelope.
The scheme deceptively called “pension maximization” is stripping unknown thousands of widows of their future security. Its sales appeal arises from the two ways that pensions may be paid. Retirees can choose a larger monthly check that stops when they die–or they can take a smaller check that’s paid for as long as the spouse lives, too.
Here’s the life-insurance angle. The husband, say, is encouraged to buy a policy at retirement or sometime before. He (hen takes the larger pension check. If he dies before his spouse, his pension is replaced by the life-insurance proceeds.
In practice, however, this scheme rarely works, says a repentant Jerry Keating of McCook Lake, S.D., once a manager for John Hancock Mutual Life. One of the clients in his office bought into pension max, he says, with a policy meant to be paid up when the man retired. Instead, the client got socked with payments he couldn’t afford and the coverage lapsed. The couple sued and John Hancock settled on terms that included a gag rule for both par-ties. An angry Keating says, “The agents didn’t know the risks and the company didn’t tell us.”
Almost every pension-max plan I’ve seen has been deceptive in some way. Unless you feel sure that your spouse will die first or won’t need extra money, take the pension that covers you both.
When you buy a cash-value policy the agent gives you several pages of numbers (the “illustration”), purporting to show how your investment could perform over 20 to 50 years. But your actual performance may depend on what happens to interest rates or stock prices. Policies that were illustrated at higher rates than prevail today are missing their targets by a mile. You may have to pay more premiums or accept a smaller payment at death.
Hal Ferrell, 47, of Batesville, Miss., is accepting nothing. In 1987 he chose Crown Life as his insurer because its illustration beat out the competitors’. But it was a fib, Ferrell charged in a lawsuit. The agent based his projections on a gross interest rate of 13 percent-2 points higher than Crown was paying at the time. In depositions, a Crown Life official said there was a bug in the policy-illustration system. To keep up his insurance, Ferrell is now paying his premiums out of the policy’s cash values. At current rates his “lifetime” coverage will lapse in about 10 years.
Hard to say. Most mortals can’t possibly spot the traps that agents or actuaries lay. You might use a fee-only insurance adviser; or try an agent you feel sure is honest, or buy only low-load policies. One rule: beware any projection that is markedly better than the competition’s.
Careful shoppers take pains to find a sound insurance company. But if that company doesn’t want you anymore, it may bounce you off to someone else–even to a troubled firm.
Take Jane Cazort of Little Rock, Ark. About 10 years ago she bought a tax-deferred annuity from First Pyramid Life, which was later acquired by Security Benefit Life (rated A + by A.M. Best).But Security Benefit didn’t want her block of annuities. So it shipped them off to the Life Assurance Company of Pennsylvania, rated in the mediocre, B+ range. Right after the transfer, according to congressional testimony, Archie Dykes, the then president of Security Benefit, warned a fellow executive, “We need to watch our liabilities with this company. I’m afraid they may go under.” So why did he dump his annuitants there?
Life of Pennsylvania soon shipped Cazort and her fellow victims to the unrated Diamond Benefits Life. Both insurers eventually failed. Cazort won a default judgment against Security Benefit, which finally took the annuities back (with financing from the state insurance guaranty funds), but the money had been frozen for four years.
Under common law your company, cannot transfer its responsibility for your insurance policy or annuity without your written consent or convincing evidence that you agree, says Joseph Belth, professor emeritus of Indiana University. If you don’t want to switch, write to your company and say so. Some states set time limits for consent. A model law just approved by the National Association of Insurance Commissioners (NAIC) would formally require consent, force insurers to explain your rights and disclose the new insurer’s financial condition. But this model means nothing unless the states make it law.
With a few exceptions the states lack the muscle to root out malfeasance, which ought to set the stage for federal intervention. But congressional reformers have been stopped dead by the one-two punch of McCarran-Ferguson and the moneyed insurance lobby. Not every insurer thinks recalcitrance is wise. “A dialogue [with the Feds] would be worthwhile,” says Thomas Wheeler, chief executive of Massachusetts Mutual Life. Even so, Sen. Howard Metzenbaum, who has held revealing hearings on insurance abuse, fears the lobby will win “unless there’s a catastrophe, with thousands of people left high and dry.”
If a new Armstrong Commission could be convened, here’s what it might say:
Pass a truth-in-pricing law. A single standard should be developed for showing the price of every policy’s death protection and the rate of return on its investment component. You may think that these figures are already disclosed, Belth says, “but everyone makes up his own home-brewed method.” If there’s uniform disclosure, other laws might not be needed. Buyers could see the truth themselves.
Sue ’em. Wronged customers who press their cases have a good chance of winning a pretrial settlement. Many insurers would rather pay than fight, especially if it keeps you from talking to people like Senator Metzenbaum or me. Says Mississippi attorney Richard Phillips, who is pressing the Ferrell case, “When public opinion gets ahead of the legislative process, the place that people turn is the courts.”
When burned consumers do go to trial. the insurance companies try to blame the agents alone. But juries are starting to turn a fisheye on firms whose line on a suspect but high-earning salesperson is “don’t ask, don’t tell, don’t pursue.” in a Texas case last year, New York Life was hit with a $21.1 million judgment for wrong-doing committed by one of its agents.
Pass a suitability rule. Stockbrokers can be challenged if they put an investor into something too risky for his or her circumstances. Insurance agents and companies should be similarly on the hook.
Ban policy illustrations. They’re so easily bent that any good they might do-by showing how a policy works -is overshadowed by the harm. Mutual funds aren’t allowed to project hypothetical performance; why should insurers be exempt? Illustration reform is now before the NAIC, which leans toward setting ground rules for projections rather than banning them altogether. The NAIC may also propose that you sign the illustration, to show that you understand it. Are they kidding? Half the agents couldn’t sign in good conscience. This smells to me like pure lawsuit insurance.
Keep insurers liable for any settlements reached in court. A gravely injured person who wins a big settlement during a lawsuit is often paid in the form of a monthly income for life. But what happens if that annuity is placed with a company that goes broke? just ask Tony Griffiths of Solvang, Calif., who lost the use of his legs in a motorcycle accident in 1982. His annuity went to the now defunct Executive Life. While the lawyers haggled over the settlement, Griffiths–as a “hardship” case–got his full monthly payments. But that money was a loan, on part of which he had to pay interest. His latest settlement, set in October, pays him 57.7 percent of his original, guaranteed income. That might be raised, but his lifetime loss could still exceed $1 million. Why should the insurer that originally chose Executive Life leave Tony Griffiths holding the bag? If it retained liability it might place its annuities more carefully.
Tell people the truth about the progress of their policies. How long will your coverage actually last if you keep on paying premiums at your current rate? Des Moines-based Central Life Assurance discloses that vital information on its annual statements to policyholders. Every responsible company should be doing the same.
Whenever I cover insurance abuse I get letters from furious companies and agents who say I’m blowing up the deeds of a few bad apples. If so, let me proffer this invitation. Join me in publicly seeking reform, so that bad apples stop causing you trouble, too.
