ON LIFE INSURANCE: PART II
Herb Denenberg Column Week Of
There are over thirteen trillion dollars worth of life insurance
in force in the
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
(Herb Denenberg is a former Pennsylvania Insurance Commissioner
and consumer advocate.)
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