Life insurance sales need to be regulated


March 06, 1994|By JANE BRYANT QUINN | JANE BRYANT QUINN,Washington Post Writers Group

NEW YORK -- Life insurance is a free-wheeling business. No other financial institution has so little restraint on its sales practices.

The result has been persistent abuse. For example, watchdogs have found deceptive pricing on cash-value policies, which combine death protection with an investment account. Customers are being widely misled as to what their cash values really earn.

There are also misleading sales presentations; what you thought was a retirement plan may turn out to be an insurance policy. And there are inappropriate sales, where an agent is motivated more by the commission he or she will earn than by what the customer needs.

Reform is overdue. New rules could save the public millions of dollars as well as support the insurers and agents who play fair. Some proposals:

1. Pass a truth-in-insurance-pricing law. A single standard should be developed for disclosing 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 being revealed, but it's fake disclosure. You don't get your true costs and yields. Besides, "everyone makes up his own home-brewed method" of disclosure, says Joseph Belth, insurance professor emeritus of Indiana University. With standardized rules, regulation could be minimized. Consumers could see the truth themselves.

2. Impose federal regulation. In 1945, life insurers persuaded Congress to pass the McCarran-Ferguson Act, which effectively freed the industry from most federal regulation. There's state regulation, but it's uneven and hasn't been able to curb deceptive sales. The feds would be tougher. A national law would especially help in the states where insurance departments are weak.

3. Sue 'em. Wronged customers who press their cases have a good chance of winning a pretrial settlement. When you have a well-documented case, most insurers would rather pay than fight -- especially if it keeps you from airing your grievances to reporters or to Sen. Howard Metzenbaum, an Ohio Democrat. Metzenbaum has held two public hearings in the past two years on life-insurance abuses and plans a third this spring.

When burned consumers do go to trial, the insurance companies generally try to put the blame on the agent. But juries are starting to turn a fish eye on insurers whose policy toward suspect but top-producing salespeople 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 wrongdoing committed by one of its agents.

4. Pass a suitability rule. Stockbrokers can be challenged if they put an investor into something too risky for his or her circumstances. No state has such a rule covering life insurance, a stunning regulatory gap. Both agents and companies should be held responsible for the recommendations they make.

5. Banish policy illustrations. These are the pages of numbers you get when you buy a cash-value policy. They purport to show how your policy might perform over 20 to 50 years. But your actual performance will most likely 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 -- forcing their owners to pay more premiums or accept a smaller payment at death.

6. Keep policyholders better informed. Many people assume that they'll have their policies for life as long as they pay the premiums the agent originally asked for. But when interest rates fall, you may have to raise your premiums; otherwise your policy could eventually lapse.

Whenever I cover misleading life-insurance sales, I get letters from furious agents who say this is all the work of a few bad apples.

If so, let me proffer this invitation. Join me in publicly seeking reform, so these bad apples stop causing you trouble, too.

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