ON LIFE INSURANCE: PART I
Herb Denenberg Column February 11, 1999
WARNING: For decades, the life insurance industry has used confusion instead of competition and non-disclosure and cover-up instead of disclosure and openness. This has enabled the industry to overcharge policyholders by billions year in and year out. So this column will serve to expose one more method of deception of the industry, and how to protect yourself when buying life insurance.
FIFTY-SEVEN VARIETIES OF Rip-offs. There are many ways to rip-off and con insurance buyers. I would count the ways, but it would take too long. So I'll just give you one way you may not be aware of. It's the National Association of Insurance Commissioners, also referred to as the NAIC. Just as the insurance commissioners themselves are often the lapdogs of the insurance industry, so is the NAIC on a bigger scale. It may be a national organization, with a prestigious name, but it is merely a bigger lapdog. Insurance regulation, including the NAIC, is more designed to protect the insurance industry instead of the consumers and policyholders.
MISGUIDANCE FROM THE NAIC GUIDE. I was reminded of this when I was in the process of buying some life insurance. The agent told me his company requires that everyone buying a policy be given a "Life Insurance Buyer's Guide" prepared by the NAIC. Most people probably assume that this is a sound, reliable, and consumer-oriented document.
As I read it again, I was reminded that it is a piece of insurance company propaganda, more noteworthy for what it doesn't tell you than for what it does. It seems designed to lure the life insurance buyer into a false sense of security. So in the process of telling you why this guide and the NAIC ought to be dumped into the nearest trash can for phony regulatory agencies, I can explain some of the important techniques you should use for buying life insurance.
THE COMPANY. The Guide starts out by stating: "This guide does not endorse any company." That's true. In fact they endorse all companies, because they are afraid to tell the public that there are many companies that any smart buyer should avoid.
Anyone buying life insurance (or any other kind of coverage) should go for financially strong companies with good reputations. There are a lot of shaky companies that may go under before you do, and shaky companies are not noted for good service and prompt claims payment.
If you just take a company at random or out of the Yellow Pages it is almost certain that you won't get a sound and high quality company.
The NAIC document doesn't make that key point, because it has neither the guts, courage, or character to offend any segment of the industry. So it gives the false and dangerously misleading impression that all companies are sound and consumer-friendly. The NAIC, as this guide keeps demonstrating is just a mouthpiece of the industry.
Here's the advice the NAIC should give: Check the financial rating of any company you are considering with the five financial rating services: A.M. Best Company, Duff & Phelps Rating Company (DCR), Moody's Investor Services, Standard & Poor's Insurance Rating Services, and Weiss. The publisher of the newsletter, The Insurance Forum, says it's a good idea to check all five services, and be sure any company you go with is reasonably high in their ratings. The Insurance Forum suggests that those most concerned about the safety of their money should limit themselves to 78 of the top companies. They include such companies as Northwestern Mutual Life and USAA Life Insurance Company.
The Insurance Forum actually has three categories of high-rated companies: 78 in its highest category for the "extremely conservative;" for those who want to be "very conservative" another 87 companies are added to the list; and finally for those who want to be "conservative" another 67 companies are added. This means the Insurance Forum recommends the top 232 companies.
When I was Insurance Commissioner of Pennsylvania, in September of 1973, I issued "A Shopper's Guide to the Financially Strong Insurance Companies" and concluded that about 80 percent of all companies would be avoided by smart insurance buyers. According to the latest figure, this is still close to being on target.
You can get these ratings simply by asking the agent. Ask the agent to give you the ratings from each rating agency (but remember that not all companies are rated by every agency). Some insurance companies advertise their ratings. You can also find publications in some libraries with many of these ratings. Finally, in some cases, you can phone the rating service and find out about the company you're interested in free of charge (or in some cases for a fee). You can also get many of the ratings on the web site of these services. For example, Standard & Poor's lists its rating on the Internet at http://www.standardandpoors.com/ratings. It provides one rating over the phone without charge at 212-208-1527. Duff & Phelps (DCR) and Moody's also have free web sits and phone numbers for ratings. Moody's will give you a rating if you call at 212-553-0377; its web site is http://www.moodys.com/insurance. Duff & Phelps gives a free rating if you call 312-368-3198; its web site http://www.dcrco.com.
Libraries still carry some of the publications of the rating agencies, but now with computers they can give patrons ratings off the Internet.
The reputation of a company for service is harder to check than its financial strength. But you can get some sense of it by the kinds of companies recommended by consumer magazine surveys. Two blue chip companies that are also highly competitive are USAA Life and Northwestern Mutual Life. USAA Life operates without agents; its number is 800-531-8000. Northwestern Mutual Life uses life agents and can be found in the phone book. In my next column, I'll have more advice on how to buy life insurance and the problems with the NAIC guide.
(Herb Denenberg is a former Pennsylvania Insurance Commissioner and consumer advocate)