Life Insurance: Never Trust a Salesman

By Stephanie Overby
November 7, 1997

waking up one morning to discover you owe thousands of dollars in life insurance premiums when you thought your policy was paid off. That is what happened to Florida retirees who bought insurance from Metropolitan Life Insurance Co. And they're not the only ones. Over 30 insurers are currently under investigation for misleading sales practices, which may lead to charges reminiscent of those recently settled against Prudential Insurance Co. of America, the country's largest insurer, and John Hancock Mutual Life Insurance Co.

All the transgressions have to do with sales of permanent insurance policies -- those that last a lifetime and build up a cash value. So if you are shopping for insurance or own a permanent policy, here is how to protect yourself against unscrupulous brokers.

Beware of a Broker Selling You a Second Policy
If an agent suggests additional coverage or a change in your current policy, get a second or third opinion from another agent, your tax attorney or financial planner. Among the illegal sales deceptions Met Life and other insurance companies have been accused of is a practice called "churning," in which policyholders are persuaded to buy new, more expensive life insurance policies using the accumulated value of their old policies. This generates a commission for the agent but rarely serves the customer well. The customers are told the switch will cost little or nothing, but it actually saps the value of their old policies and hits them with a big premium bill after the old policy is used up. Another insurance shell game, called "piggybacking," involves offering customers another policy either free of charge or at a reduced cost, when they're actually paying the premium using dividends or loans from the older policy until it is depleted and lapses.

Choose Your Agent Wisely
The best way to find a trustworthy life insurance agent is to solicit recommendations from your friends and family. Barring that, you'll want to ask questions about things like an agent's insurance company affiliations, length of time in business and license and advance training. An independent agent, as opposed to one who is captive to a particular insurance company, will also be more likely to offer you a broader choice of products.

Finally, it's a good idea to choose an agent who sells more than just life insurance. "You're less likely to be a victim of unscrupulous sales practices if you utilize an agent who provides other types of insurance products, like homeowner's insurance and auto insurance," explains Todd Muller, assistant vice president of consumer affairs for the Independent Insurance Agents of America. "The theory is that if the agent is providing you with more than just one insurance product, he has a true vested interest in your well being."

Get It in Writing
"Always get documentation from agents. Don't go on oral promises of what's going to happen," says Florida Insurance Commissioner spokesperson Don Pride. And, of course, don't sign anything until you've read it, and never sign a blank piece of paper.

Trust Your Instincts
If you have a funny feeling about what an agent is offering you, like additional coverage or a new, better policy for almost nothing, trust that feeling. "It remains true that if something seems to good to be true it probably is," says David Cook, president of the Life and Health Insurance Foundation for Education.

Consider Term Life Insurance
Finally, you can avoid possible problems associated with purchasing permanent life insurance by opting for term life insurance instead. Term life lacks the cash value of a permanent policy, but term life coverage is much more affordable (with premiums currently at historical lows) and you're probably better off investing the money you'll save in your 401(k) plan. Our article "Should You Buy Term or Permanent?" will help you decide.

A Swindler's Glossary

Churning: The agent persuades the policyholder to purchase a new, more expensive life insurance policy using the accumulated value of his old policy, generating a commission for the agent. The customer is told the switch will cost little or nothing, but it actually saps the value out of his old policy and can hit him with big premium bills later on.

Piggybacking: The agent offers the policyholder another life insurance policy free of charge or at a reduced cost, when the customer is actually paying the premium using dividends or loans from the older policy until it is depleted and lapses.

Vanishing premium: The agent tells the policyholder she will only have to pay premiums for a fixed number of years, at which point dividends from the policy will be enough to cover the costs. But interest rates drop and the premiums continue.

"Tax-deferred investment": The agent tells the customer he is making contributions to a tax-deferred college or retirement account when in fact the policyholder is actually just paying premiums on a plain old permanent life insurance policy. © 1997 SmartMoney

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