Deceptive agents 'churn' to victimize the insured

STAYING AHEAD

April 10, 1995|By JANE BRYANT QUINN

NEW YORK -- Do you have a small cash-value life insurance policy? Have you had it for many years, so it's mostly paid up? If so, you're a sitting duck for an especially contemptible form of deceptive selling, known as "churning." Two new churning scandals are currently under investigation, in California and Illinois; another erupted in Pennsylvania last year. If you become a victim, you could lose both the cash savings in your insurance policy and, eventually, the policy itself.

Here's how churning works. An agent calls and says, "I know a way you can get more insurance for little or no additional cost. When you die, your loved ones will be better off." But the agent is lying. The new policy does cost more -- a lot more. You just don't realize it when you sign up.

How do you pay for the new policy? You take regular loans against the savings (known as the "cash value") that have built up in your older policy over the years. The churners call your savings "juice." Every loan reduces your cash value and your death benefit. Eventually, the juice runs out and your policy lapses. Goodbye life-insurance savings. Goodbye security for your spouse. Older people are special targets, because that's where the money is.

No one knows this better than Carol Nicholson of Alton, Ill., who has joined in a lawsuit against the Prudential Life Insurance Co. of America. For years, her husband, Keith, had carried four Pru policies worth about $30,000. Then, agent Homer Gernigin sold him a new $100,000 policy which, the lawsuit alleges, was supposed to cost nothing out of pocket.

It didn't work that way. Unbeknownst to the Nicholsons, the lawsuit claims, they were borrowing against the cash value in their old policies to pay for the new one. When the cash value was used up, the new policy lapsed. The Nicholsons got a notice about the lapse and the loans. But, Carol Nicholson alleges, the local Pru office said not to worry, all the policies were in full effect. She thought they had $130,000 in coverage. But when her husband died of leukemia last year, she was appalled to learn that she could collect only $22,000.

Prudential won't comment on Gernigin (who is now deceased) or on this pending lawsuit. The Illinois Department of Insurance is investigating Pru's sales in the state. Former Pru agent Michael Weaver, who used to work in the Alton office, says he saw forms for taking out loans against policies, with the loan amounts left blank, signed by clients who didn't know they were borrowing. (What clients signed were called "disbursement" forms, which could pass as routine paperwork.) Pru spokesman Robert DeFillippo says that no such loan forms were found in the Alton office.

In Los Banos, Calif., Joyce and Roland Ocken say they succumbed to a pitch by former Metropolitan Life Insurance agent John Steele. According to a complaint filed with California's Department of Insurance, Steele told them MetLife was trying to get rid of older policies, but that the insurance could be replaced with a larger policy, at a low price. They agreed to buy. Too late, they found they weren't paying enough to keep their new policy in force for life. In 15 years, when Roland Ocken reaches 79, the insurance may run out. Steele, now with Allstate, says he didn't mislead the Ockens and that nothing is wrong with their policy.

As aggrieved buyers speak up, lawsuits proliferate. One is planned in Florida against Prudential. Policyholders in Pennsylvania have brought churning charges against John Hancock Mutual Life and New York Life. Pennsylvania's insurance department forced MetLife to pay restitution to certain deceived consumers and is exploring the sales practices of Pru, John Hancock, American General Life, Allianz Life and Monumental Life.

The moral: There ain't no free lunch. If an agent offers to get you more insurance for little or no cost, show that agent the door.

Next time: How to protect yourself.

Jane Bryant Quinn is a syndicated columnist. Write to her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y. 10022.

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