What's Wrong with Life Insurance
Stern, Philip M.
What's Wrong with Life Insurance by Philip M. Stern One of the most widely sold products in America—well call it Product X—has the following characteristics: • The average customer must pay $1...
...But that single sentence glides over the fact that the Post, after assigning him to probe the industry periodically over a three-year period, failed to print more than a snippet from the series of articles he wrote...
...If whole life policies are so unsuited to customers' needs, why do people go on buying them...
...Moreover, many of the largest companies will submit their figures to Computone only on the condition that they will not be disclosed to their competitors...
...A lone Metropolitan Life policyholder, one Lawrence Cohen, observed some years ago that his premium notices said he and other policyholders had the right to vote for directors...
...Life insurance companies are also unsually well insulated from their owners...
...Kessler explains that insurance companies use the higher premiums on whole life policies to make investments for themselves...
...A ghetto youth caught breaking a store window to steal a TV set will go to prison...
...Expansion of group life insurance...
...As with savings bank insurance, life insurance lobbyists have succeeded in getting states to limit such policies to 2.5 times an employee's annual salary...
...According to Kessler, this disparity, plus swiftly revolving doors (a third of the state insurance commissioners come from the industry and a third leave for jobs with insurance companies), result in the companies "mak [ing] the rules themselves ?' Donald G. Maslik, a 20-year veteran insurance salesman who now sells securities as well, told Kessler, "The misrepresentations that go on in [the insurance] business would bring license suspensions or revocations if they were selling stock instead of life insurance...
...Kessler observes that in the past decade, Newsweek has mentioned the insurance industry in only 116 stories, compared to 2,791 references to banks...
...The prospects for that, however, are negligible, judging from Congress's veto of a Federal Trade Commission probe of the insurance industry in the late 1970s...
...This underscores Kessler's most important point: insurance companies are to an extraordinary degree accountable to no one—not to public regulators, not to the press, not to their owners, and, as we have seen, least of all to their customers...
...It's never really said...
...In contrast to the usual run of privately funded environmental and "public interest" groups that monitor other industries, there is, to my knowledge, only one such group that follows insurance— the National Insurance Consumers Organization, a Nader offshoot with a staff of two...
...What's Wrong with Life Insurance by Philip M. Stern One of the most widely sold products in America—well call it Product X—has the following characteristics: • The average customer must pay $1 to get 14 cents' worth of Product X. • The average customer is oblivious to that because Product X, unlike most consumer products, carries no price tag, sticker, or label...
...By far the most expensive variety of Product X is offered only to the very poor, and they buy $1.5 billion of it every year...
...What's more, since one out of four customers drops his lifetime policy after only two years, salesmen constantly have to root out new buyers...
...senator and secretary of health and human services, suggests, sheer complexity can conceal many wrongs...
...Kessler asks, "Why would consumers spend $50 billion a year for a product they blindly purchase without shopping for the best prices...
...The second kind is called "whole life...
...He tried to become a candidate himself, but to do so he had to communicate with his fellow owners...
...The bank advertises, and the customer goes to the seller rather than vice versa...
...The abuse is not new—in 1905, Louis Brandeis called it "legalized robbery...
...Annual sales: $50 billion...
...The principal cause is what I call non-competition by obfuscation...
...Kessler relates Cohen's Catch-22 frustrations in battling a battery of Metropolitan lawyers and the New York Insurance Department in his efforts to obtain the policyholder list...
...Insurance companies throw so many complex variables into their whole life policies that they make price comparison virtually impossible—even to the most sophisticated and curious consumer...
...But thanks to life insurance industry lobbying, savings banks in only three states—New York, Massachusetts, and Connecticut— may offer life insurance, and then with a ceiling of $50,000 per policy...
...In his effort to be "an intelligent consumer," Magner wrote to two life insurance companies requesting price information...
...Kessler also offers evidence that the obfuscation is no accident...
...Selling pure term insurance by mail...
...Product X is life insurance...
...If not, you buy a new policy the next year...
...Kessler describes how Robert A. Beck, chairman of Prudential, in the course of a smooth-as-silk appearance on the Phil Donahue show, denied "strongly and unequivocally" that the Pru's commission structure encouraged its salesmen to push whole life in preference to term insurance...
...And why do nine in ten consumers take the agent's recommendation and buy whole life...
...Worst of all, Computone conceals its price comparisons from state insurance commissioners, whose mission is to protect consumers and keep the industry in check...
...Product X is so ill-suited to buyers' needs that, even though it's sold as a product-for-a-lifetime, within two years one customer in four decides he has made a mistake and discards it...
...That indictment may be summed up in this single fact: When all is said and done, the average amount paid out in death benefits—purportedly to care for the insured's loved ones for the remainder of their days—is $5,068, "barely enough," as Kessler puts it, "to pay for a funeral" Philip M. Stern is a Washington writer...
...The basic scam is fairly straightforward...
...Finally, as long as insurance buyers are kept in the dark about comparative prices, the industry will remain unaccountable to its customers...
...Congress saw to that in 1945 when it handed over insurance regulation to the states...
...The book is also thin on public policy solutions to the life insurance problem...
...For $155, a man of 32 can buy a policy from Metropolitan Life that will pay his family $100,000 upon his death...
...Consumers stay out...
...Kessler sets forth various ways of beating "the insurance game"—but notice how in each case the industry has succeeded in building tight fences around competitive alternatives: • Savings bank life insurance...
...In the insurance industry, the salesman laughs all the way to the bank ." Even more scandalous, the absence of effective state regulation permits the insurance industry to exploit the poor by selling them a special type of coverage known as "industrial" life insurance...
...Because consumers have no way of knowing the price of Product X, some may pay twice as much for Product X as their next-door neighbors...
...The Life Insurance Game...
...But to get the facts you have to own a $3,000 Computone terminal and know secret access codes...
...I don't think anybody [in the industry] in his right mind would say it...
...Kessler's own experience is a case in point...
...When ITT Life Insurance embarked on such a campaign, it received a number of mailed threats from insurance agents of other companies ("We shall be looking for you...
...Clearly, a massive amount of hornswoggling is going on, and it is vividly described in Ronald Kessler's lucid and much-needed new book...
...Other financial institutions—banks and securities traders, for example—are subject to federal curbs...
...He was told Metropolitan held no annual meeting...
...Kessler's book, by his own admission, is short on "how-to's ." The topic "How to Buy Life Insurance" is confined to a brief and generally unhelpful appendix...
...Let's start with the feebleness of government regulation...
...Little wonder that only one-fifth of Prudential's premium dollars come from term insurance...
...For example, Computone, Inc., an Atlanta-based computer data company that does generate meaningful insurance price comparisons, provides the information to life insurance companies and agents...
...In an interview, Kessler said his editors told him that his reporting "didn't lend itself to a newspaper series," that the material wasn't interesting enough...
...At the outset he says, "This book began as a project for The Washington Post," where Kessler has been a reporter since 1970...
...He adds that for the companies, investment profits "account for twice as much return on the dollar as death benefits" (the product the company is supposedly in business to sell...
...Why such a low return...
...But chances are nine out of ten he'll be talked into buying a policy that, for the same $155, carries a death benefit of just $8,055...
...Forty-one cents on the dollar...
...That tiny organization keeps watch over the entire spectrum of insurance: auto, property, and casualty, as well as the gigantic life insurance industry...
...Answer: they don't know—and can't find out—how much they're paying...
...The largest companies are mutuals, owned, in theory, by their policyholders...
...Industry leaders deny it, but the reason insurance salesmen push whole life rather than term is simple: money...
...But if Kessler's book is short on solutions, it stands as a powerful, well-documented indictment of the life insurance industry...
...The fundamental problem," he says, is that the industry "is selling a product that no one wants" Consequently, unlike most salesmen, the insurance peddler must go to the customer, not vice versa...
...In spite of all this, two out of three Americans have bought Product X. They spend an average of a week's wages each year paying for it...
...So Dr...
...nor do the sellers of Product X advertise their prices...
...James Magner, a research physician at the National Institutes of Health, who explores the molecular structure of hormones for a living and is, therefore, accustomed to analyzing complex data...
...Kessler points out that when insurance companies have to compete with other industries on the basis of discernible prices—in the sale of individual retirement accounts, for example—they "usually flounder...
...It was inscrutable," Magner told Kessler...
...His crime is simple and visible...
...Signed,] NY...
...Schweiker can take comfort from the secrecy that shrouds life insurance practices...
...She sold him a whole life policy costing five times what a term policy with the same death benefits would have cost...
...Life' and "We at Metropolitan tell how ITT prostitutes our profession...
...But merely by cloaking their activity with overwhelming intricacy, insurance industry leaders have achieved precisely the same anticompetitive result, with impunity...
...While other appendices contain some bland, aggregate statistical information ("The Top 20 Insurance Companies," for example), there is no ranking of the prices various companies charge for a commonly sold kind of insurance policy—the very information Kessler correctly argues is essential to introduce competition into the industry...
...In fact, Kessler says, a Prudential agent selling $100,000 of whole life gets a first-year commission of $740, compared to one of $78 for selling the same amount of term insurance...
...What is interfering with the Ronald Reagan/Adam Smith free-market forces...
...One major reason, Kessler says, is "sheer waste"—primarily a horrendously costly sales mechanism...
...He quotes Francis E. Ferguson, chairman of Northwestern Mutual, tenth largest in the country: "Life insurance companies make the policies more complex to make it difficult to compare the price[s...
...A group of corporate executives caught in a smoke-filled room conspiring to fix prices in their industry could also be jailed, so straightforward is their violation of the antitrust laws...
...The first kind of insurance is "term" insurance...
...As a result, Kessler says, "companies with assets of tens of billions of dollars are supervised by state insurance departments that barely have enough people to answer their own telephones...
...Yet state regulators not only permit it, they require the use of special mortality tables for poor customers, with twice the normal death rate—statistics belied by the abnormally high profits raked in by the companies that sell industrial life policies...
...It works just like fire insurance: if you die (or your house burns down) that year, the company pays...
...It's a mixture of insurance and investment—and a poor value on both counts...
...It's an oft-told tale—although, judging from the sales figures, not oft enough...
...Holt, Rinehart and Winston, $16.95...
...Their management is self-perpetuating...
...According to Kessler, Aetna Insurance, whose chairman had spearheaded the industry drive to kill the study, "showed up the worst in the FTC's confidential rankings of the costs of 200 policies...
...Kessler's Exhibit A is Dr...
...And in 1983, Richard S. Schweiker, president of the American Council of Life Insurance, warned an audience of insurance salesmen, "We can't assume that we are safe from [consumer] scrutiny because of seemingly impenetrable jargon or forms or actuarial tables !' As Schweiker, a former U.S...
...Judging from his book, however, there was no shortage of headline material—the startling fact, for example, that a dollar of premiums yields only 14 cents of death benefits...
...Life insurance companies are also astonishingly free from press scrutiny...
...These policies cost twice or four times as much as ordinary insurance and yield four times the profits to sellers...
...Ultimately, he withdrew his petition and asked for permission to speak at the annual meeting...
...The experts seem to agree on one point, though: significant reforms hinge on Congress reasserting federal control of this $600 billion industry...
...For each dollar of premiums paid, the average return is 14 cents in death benefits and 27 cents in dividends...
...Magner did what most helpless insurance buyers do: he bought from someone he knew—in this case, his sister-in-law...
...But not the mighty insurance industry, with its $50 billion in annual sales and its $600 billion in amassed wealth...
...He got back a bewildering set of numbers that defied comparison...
...He has covered the life insurance industry for The Washington Post and is author of The Rape of the Taxpayer...
Vol. 17 • May 1985 • No. 4
