Prudential's policyholders will be paying for cheating scandal

Staying Ahead

August 12, 1996|By Jane Bryant Quinn

NEW YORK -- Yet another major life insurance company caught in a wholesale cheating scandal has promised repairs to customers who were deceived by its agents.

The culprit this time: the Prudential Insurance Co. of America, based in Newark, N.J. In a settlement brokered by state insurance regulators, Pru agreed to $35 million in fines plus restitution to policyholders with an estimated value of $1 billion.

Last September, New York Life settled a class-action lawsuit with a restitution-and-arbitration plan, at an estimated cost to the company of $65 million. A dissident policyholder challenged it in court (unsuccessfully, so far), so it hasn't yet taken effect.

Two years ago, Metropolitan Life agreed to fines and restitution estimated at upward of $100 million.

Unlike MetLife and New York Life, Prudential has changed top management. Pru's new chairman, Arthur F. Ryan, took out full-page newspaper ads to apologize to policyholders and has agreed to a potentially broader restitution program than the one offered by his competitors.

But all the publicity about the fines hasn't seemed to stop many other insurers and their agents, who continue to perpetrate the same kinds of frauds. I hear from consumers every week about policies going sour or sales pitches that mislead.

The state insurance regulators are continuing to investigate the industry.

But they haven't the resources to police every life insurer in the country, and there's not enough price disclosure to help the marketplace police itself.

Buyers generally believe what their agents tell them, for better or worse.

Among the ways that insurance buyers are ripped off, especially buyers of cash-value insurance:

The agent sells you a policy as a retirement investment rather than as life insurance. Wrong. Life insurance is for people who need death protection. For pure retirement investments, you're better off with tax-deferred company plans, annuities and mutual funds.

You are told that you'll have to pay only a limited number of premiums; after that, the policy is supposed to pay for itself. Wrong. You have to pay considerably more when interest rates decline, which the agent may not have explained.

You are told you can add to your current policy free or at low cost. Wrong. The second policy is paid for with dividends and cash values drawn from your first policy, a practice known as piggybacking.

Eventually, your first policy will run out of cash and lapse. At that point, you'll have to pay the second policy's premiums out of your pocket, which you may not be able to afford.

You are told that your "retirement savings" are tax-free. Wrong. There's no tax if you die and leave the policy to heirs. But you'll generally owe taxes if you withdraw most of your savings in retirement or if you borrow the cash value and then let the policy lapse.

You are induced to cancel one cash-value policy and use the money to buy another, without full disclosure of the price of the switch. Wrong. Switching is generally unwise. The agent earns a commission and you lose cash value.

The agent induces you to sign a blank form, claiming that it is "just paperwork." Then he or she uses the form to piggyback a policy that you didn't authorize. Wrong.

If you won't sign, agents have been known to "window" your signature -- that is, put your actual signature against a window and trace it onto the form. Another word for this is "forgery."

The Pru settlement will take effect state by state, as each insurance commissioner signs on. A few are holding out, in hopes of getting a better deal.

You're eligible for some sort of offer if you bought a cash-value policy from Pru anytime from 1982 through 1995, even if you weren't misled. Some 10.7 million people qualify.

The first letters outlining the offer are being mailed this month.

If you have questions, or don't get a letter and think you should have, call (800) 736-8913.

The offer will include beneficiaries of dead policy holders, who may have been tricked out of their full death benefits.

Also, deceived customers who let their policies lapse.

Ironically, the cost of restitution will come out of the pockets of all of Pru's policyholders because they're the owners of the company.

"It's like fining the victim for the crime," says Robert Hunter of the Consumer Federation of America.

In justice, the executives and salespeople should pay, out of their commissions, salaries and bonuses. But don't hold your breath.

Pub Date: 8/12/96

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