Herb Denenberg Column Week Of February 11, 1999


There are over thirteen trillion dollars worth of life insurance in force in the United States. Yet one of the most difficult tasks is to buy the right policy, in the right amount, from the right agent and the right company. That's not because life insurance is so complicated. It's because the industry wants to make it complicated and confusing, and has a policy of withholding the most basic information. It's also because so many life insurance agents are not properly trained.


Here's one obvious example of what's wrong with the market. I recently decided to buy some life insurance, and the agent could not even provide me with a specimen copy of the policy I was considering. That's pathetic, and so is almost all of the industry when it comes to providing information to its customers and to the media.


This column examines one of the many ways the life insurance industry uses to keep the public in the dark. It's through the organization of all the insurance commissioners, called the NAIC, the National Association of Insurance Commissioners. Many insurance buyers assume that a brochure on buying life insurance published by the NAIC would be a sound, reliable, and consumer-friendly document. In fact, one of its most widely circulated publications, called "Life Insurance Buyer's Guide" is merely a thinly disguised propaganda piece for the industry. The NAIC works to protect the life insurance industry, not to protect the public.


This guide has become required reading for most life insurance buyers. Companies may require their agents to give a copy of this guide to customers and make sure they read it before buying coverage. Ironically, the guide is used to prevent abusive sales practices and in response to scandals that have rocked the insurance industry and its sales organizations. Yet the guide itself is a bit of a ripoff, and may mislead more than educate the buyer. In the course of reviewing the NAIC guide, I will tell you what's wrong with it, and in the process tell you how to buy life insurance, including names of some of the best companies.


THE AGENT. The NAIC guide advises you to go to a life insurance agent for help. But it doesn't tell you how to find one, or that there are a lot of lousy agents in the marketplace. You should pick an agent with care, just as you would pick any other professional. What is there educational background? How long have they been in the business? Have they had special life insurance training (such as the designation Chartered Life Underwriter, the CPA of the life insurance business)? Do they represent financially sound companies? Do they efficiently provide you with the kind of information you need and ask for? Do they sell you a policy, pocket their commission, and then disappear until they want to sell you the next policy?


Don't assume, as does the NAIC, that all agents are interchangeable.


There are all kinds of problems with life insurance agents. There is the high turnover, almost reminiscent of the turnover of a restaurant. There are commission structures that encourage the sale of whole life rather than term and encourage agents to churn (drop old policies and buy new ones). If you rely on an agent, check them out with care. Consider this caution from a publication of the Consumer Federation of Pennsylvania: "After all, it's not your fault that agents are trained and provided enormous financial incentives to sell you the wrong kind of policy. Successful life insurance salespersons are expert at getting people to buy before they've had a chance to shop around."


You should be able to treat the life insurance agent as someone you can trust to protect your interests. Trust them if you must, but verify what they have to say and what they want to sell you.


THE POLICY. The NAIC guide says it does not endorse any policy. Again, it is more interested in protecting the markets of life insurance companies than the interests of policyholders. But some of the best consumer organizations in the country typically endorse term rather than whole life or other cash-value policies. Both Consumers Union and the Consumer Federation of America recommend term for most people. Whole life tends to be too expensive, too complicated, too hard to comparison shop, and too inflexible. What's more whole life may not make sense, as most people need life insurance only during their working years, not until they hit age 100.


Ralph Nader is even more critical of whole life. He once wrote: "Don't buy any life insurance with cash values (i.e., whole life). It's too hard to tell good cash value policies from bad ones, and you lose too much money if you don't hold the policy for 20 years."


Critics of the life insurance industry often say the business competes by confusion and resists disclosure, That is especially obvious when it comes to marketing whole life insurance.


If you do decide on whole life (for some special reason, such as one relating to estate planning or some buy-and-sell arrangement for a business upon death), Consumer Reports suggests a low-commission company such as Ameritas. The Consumer Federation of America also recommends Ameritas along with such companies as Northwestern Mutual and USAA Life.


COMPARISON SHOPPING. The guide recommends that you "compare similar polices from different companies to find which one is likely to give you the best value for the money." It fails to explain that there are huge variations in cost from company to company, and if you don't shop and compare carefully you are almost sure to get overcharged.


OTHER INFORMATION. The guide says it provides only basic information. For more information, it recommends you go to a life insurance agent or company or to the public library. If it wanted to be helpful, it would send the reader to some of the reliable sources of insurance information, including Consumers Union and the Consumer Federation of America.


The guide fails to talk about the new 800-line phone services and web sites that provide free information on term rates. For example, you can call AccuQuote at 800-442-9899. It offers free quotes from its database of 250 companies.


There are also many web sites that provide free quotes on term, including Quotesmith at www.quotesmith.com.


Unfortunately, the life insurance industry is so out of touch with what buyers want to know and so crippled by their policy of non-disclosure, that you can often get more information easier and faster through these new web sites or through an 800-phone service than you can from an agency or company. The company, which I've found to do the best job of providing information over the phone is USAA Life of San Antonio, Texas. For a quote you can call 800-531-8000.


FAILURE TO WARN OF RECENT LIFE INSURANCE SCANDALS. If the NAIC was interested in informing rather than covering up, it's guide would warn the public about life insurance scams that have ripped off policyholders for billions of dollars. Abusive ad dishonest sales practices have been widespread, and there is no reason to believe that they have been totally eliminated. The life insurance industry has admitted it has a huge sales problem, but it still wants to keep the public in the dark about what to look out for.


Among the standard scams are replacing old policies unwisely with new ones so the agent can get another fat first-year commission; making the return on cash-value life insurance look better than it is likely to be; selling more expensive whole-life coverage rather than more affordable term; and failing to warn about the huge waste in buying whole-life and then quickly dropping it. James Hunt, actuary of the Consumer Federation of America, has estimated that policyholders lose $6 billion a year because they buy whole life insurance and then drop it in the first ten years.


IN A NUT SHELL. If you aren't going to spend much time educating yourself here's life insurance buying in a nut shell. Call USAA Life in San Antonio on its toll-free number at 800-531-8000. Ask for information and a quote on the kind of life insurance you're interested. You'll be getting one of the financially strongest companies in the country; one that is very competitive; and one that is known for good service. To play it safe shop further, but for most people USAA will be a good start and chances are it will be a good finish, too.


(Herb Denenberg is a former Pennsylvania Insurance Commissioner and consumer advocate.)

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