THE SCREWING OF THE AVERAGE MAN The Case for the Extended Family: Life Insurance
Lehner, Urban
THE SCREWING OFTHE AVERAGE MAN : The case for the extended family: Life Insurance today by Urban Lehner As cinematic art, the 30-second clip is hopelessly flawed by melodrama. But as an...
...A young father with children would certainly be unwise to be without some coverage...
...But there is something about the complexity of life insurance that seems deliberate...
...Who else has the time to campaign on a Wednesday afternoon...
...Indeed, charges that life insurance as currently marketed is an out-andout fraud reverberated through hearings held in late Feibruary by Senator Philip A. Hart’s antitrust and monopoly subcommittee...
...Yet this person, who would blanch at the idea of allowing a three-speed blender into his home, owns a $50,000 cash-value life insurance policy...
...In the 189Os, with sentiment for (and against) silver running high, some companies refused to lend money to governmental agencies of states that had legislated against payment of debts in gold...
...Fine Print Finessing If that figure is accurate, and Denenberg swears it is, then life insurance has earned a place alongside innumerable sellings...
...Yet by a combination of opaque phraseology, murky prose, and optional extras, the people who write life insurance policies have managed to make them almost incomprehensible...
...But the reaction to Denenberg’s shopper’s guides serves as a rough gauge of a prevailing public mood that all is not right...
...And as our work becomes more intricate, our ability to cope with intricate problems outside our work declines...
...If you’re still alive when renewal time rolls around, it is true that you will have literally nothing to show for your premiums -other than having been insured for five years, Because your risk of dying increases with each passing year, your renewal premium will rise as you grow older...
...With a variable policy, the cash value would fluctuate above a stipulated minimum death benefit with the rise and fall of the stocks and bonds in which premiums were invested...
...It builds cash values you can borrow against or use for your retirement, and it is in fact “permanent” insurance at a level premium (basically, the level premium is a trick of averaging...
...In 1971, the last year for which figures are available, total life insurance in force in the United States was $1.5 trillion, up 139 per cent over 1961...
...premiums were collected each payday, before the insured could squander his earnings else where...
...It is a compelling argument...
...The upshot is somewhat startling: policy costs varied as much as 170 per cent...
...cash-value policies and the role of agents, few people have stopped to wonder what the life insurance industry does with all those premium payments it mops up...
...The Price on Your Head The Senate hearings, where the termlcash-value debate came under the stark scrutiny of the television lights, were not without intellectual roots...
...Goddam,” Denenberg declared, “we’re kicking hell out of the marketplace...
...The rise of the mail order health insurance company also evinces industry dissatisfaction with the agent system...
...This hocus-pocus, discredited years ago, proves nothing...
...Americans bought $1 89 billion worth of new life insurance in 1971...
...Today, despite his attacks on the industry, Denenberg pays $2,000 a year in premiums on life insurance policies worth nearly $200,000...
...Goodby Hartford, Hello Wall Street Dissenters say you pay dearly for all the supposed advantages of cashvalue life insurance...
...Because the companies we deal with convey such an aura of permanence-among the industry leaders today are the same concerns that led the industry in the 1890s-we are lulled into thinking of life insurance as an eternal verity, into thinking that there must be a good reason why we have always invested in life insurance...
...The Pennsylvania Insurance Department is no longer able to send copies to out-of-state residents...
...Some 75 per cent of the insurance in force today is of this variety...
...For one thing, the costs of only the largest of the 480 companies doing business in Pennsylvania are charted...
...Such comparisons do not sit well with the industry, which prefers to focus on the “service” its agents render, both by counseling families and by taking part in the many civic activities that have become an informal part of the agent’s job...
...Companies catering to military personnel, forced to deal by mail with a largely transient clientele, have been doing it for years, and usually at lower premiums...
...It has grown apace with the increasing complexity of our society...
...They’ll take the term insurance advice, but we doubt many will even start on the investment program that goes with it...
...Among $25,000 five-year renewable term policies, the five best offered were by: USAA Life Insurance Company, Berkshire Life Insurance Company, The Prudential Insurance Company of America, Home Life Insurance Company, Mutual Benefit Life Insurance Company...
...Some of 11s do...
...You can count on two hands the nations of the world whose gross national product in 1971 exceeded the total income of U. S. life insurance companies...
...For another, the cash-value guide ranks the companies according to the average yearly cost over a 20-year period starting at three different ages-20, 35, and 50...
...you overpay in the early years of the policy so that you can underpay in later years...
...Aside from paying tribute to the industry’s economic muscle, this litany of statistics underscores something else about life insurance: the extent to which it has become an unchallenged article of faith for every American...
...Of the 1,490,000 people employed by the life insurance industry in 1971 , some 450,000 were agents...
...Even if it did, the agent is not likely to provide comparative net costs of other companies’ policies...
...Governments quickly found it necessary to legislate against such insurance because of the inordinate number of murders that seemed to result...
...Are they worth the money...
...Are there any optional features built in...
...As Denenberg sees it, term vs...
...They will undoubtedly claim that such a statute would give shoppers less freedom of choice...
...Personal Demeciation Here is how term insurance works: You buy it for a given “term” of years, typically five...
...Alternately, in what is called a “decreasing term” policy, the premium will remain level, but the face value will decline over the years...
...The insurance company wagers that you will remain alive at least until the total of your paid-in premiums plus the interest earned by investing them exceeds the face value of the policy...
...But where is the man so cruel that he Urban Lehner is a Philadelphia reporter...
...While Ralph Nader tilted with the auto industry during the mid-60s, an army of critics blasted away at the life insurance industry in a series of books and articles...
...Philadelphia Evening Bulletin columnist Rose DeWolf did just that...
...While the idea of a federal solution to every problem has become less tolerable even to liberals, the insurers will have to do a better job of explaining what we are getting for our .life insurance dollar, or the passage of a “Truth-in-Life-Insurance Act” may not be too far down the pike...
...Would she if the husband died...
...Required by state laws to accept the salesman’s full first-year commission as a one-time expense in reporting “statutory earnings,” insurance companies have increasingly taken to reporting a second set of figures as well-“adjusted earnings”-showing what profits would have been were salesmen’s commissions evenly averaged out over a period of years...
...What about your old age...
...Elizur Wright, insurance commissioner of Massachusetts in the mid-1 800s and the Herbert Denenberg of his day, wrote: “I became persuaded that life insurance was the most available, convenient, and permanent breeding place for rogues that civilization had ever presented...
...As befits an industry with roots in the 19th century, life insurers assume that either the wife is too frail to work or a husband would not want her to...
...In some legislatures passage of no-fault auto insurance has come down to a fight between insurance men, who have generally favored it, and lawyers, who have bitterly opposed no-fault schemes...
...And of the few that do start, still fewer will carry it to completion, for it’s too easy to sabotage such an account for a new power boat or a summer home...
...Booms the ominous voice of the narrator: “If you die, young man, will your son have a backboard to shoot at...
...What is being insured is the future ability to provide for our families...
...As long as we aren’t confusing insurance with some sort of old-age pension plan, we should not be startled by the concept that at 64, with our income-earning years mostly behind us, our lives are actually worth less than when we were 25...
...Willing Victims Needless to say, “the enemy” does not see it that way...
...Other critics are not so kind...
...Granted, we then need something for our old age-but is that something life insurance, an annuity, a savings account, real property, or what...
...Salesmen for the “good deal” companies began using the guides, and young men thinking of becoming agents sought Denenberg’s advice...
...But as an example of a certain genre of television selling, it is unexcelled...
...Even colmmercial bank savings accounts currlently pay more than four per cent...
...Beware of net costing At some point, the average man, befuddled by SO-word sentences and groggy from trying to master the arcane argot of life insurance delivers himself into the hands ot an agent...
...From the customer’s point of view, the agent system has a serious shortcoming...
...Since the turn of the century, the cash-value policy has come to be the industry’s lifeblood...
...There are probably any number of churches, charities, and parochial schools that would not have made it financially had they not been able to enlist the aid of the local life insurance salesmen to drive buses, organize bingo games, run fund drives, and otherwise contribute time...
...No one who testified-including Denenberg, whose motto “Populus Iarndudum Defutatus Est” translates roughly into “The Public Has Been Screwed Long Enough”-put a dollars-and-cents value on the screwing...
...Advice like that in the Consumer Reports ‘article gives many readers an excuse for not buying the permanent life insurance they need and could afford with a little self-discipline...
...Furthermore, the dissenters argue that buying cash-value life in effect leaves you underinsured, because, for the same annual premium that will buy a $1 5,000 or $20,000 cash-value policy, you could purchase a term policy worth around !li 100,000...
...And while some attempt was made to adjust for differing policy features (most notably, the provision-optional in some policies, standard in othersthat the company will waive or even pay premiums should you become disabled), the permutations are so numerous that no such effort can be completely successful...
...Agents point out the superiority of cash-value by saying that term insurance “nnelts away like a block of ice in the sun, leaving a big puddle of nothing...
...Predictably, some of the pro-term books were written by stockbrokers and mutual fund salesmen...
...That, of course, is not now the case, nor has it ever been...
...Security analysts checked the guides before putting out a “buy” recommendation on a life insurance stock...
...The real problem is that the complexity and diversity of life insurance policies obscures their true cost, thus effectively minimizing price competition...
...But according to the industry’s critics, even more remarkable than this grand swindle’s breathtaking scope is the classic way it is executed...
...Buying a policy for its low premium alone would be like choosing a Toyota over a Porsche because it costs less...
...Like Theodore Roosevelt’s Bull Moose reform movement, consumerism assumes that “the people” will right all wrongs so long as they have the facts...
...You hit the jackpot if you die the day after the policy takes effect...
...Through a series of seemingly simple steps of division and subtraction, th.e agent will isolate the cash surrender value of the policy from the potential death benefit -thus “proving” that the insurance really cost...
...Because they see themselves as quasi-eleemosynary institutions, existing for the benefit of widows and orphans, life insurance companies have always invested their assets conservatively...
...Denenberg’s shopper’s guides take many of these factors into account in their listings of the best and worst life insurance buys...
...Whose interests does the agent represent...
...Not surprisingly, the “adjusted” profits are usually larger...
...They also take into account another significant but oftignored variable: how much your money could yield elsewhere...
...As long as all the generations lived in the same household, the head of the family didn’t need life insurance...
...Companies that ranked poorly withdrew policies...
...But for people without the responsibilities children and mortgages imply, the need for life insurance is open to question...
...However, a commercial publisher reportedly plans to bring out an updated version...
...One of the major sources of confusion is the difference between the two great types of policies: “term” life insurance and “cashvalue” life insurance...
...And again, there is, the point that as we grow older, our need for life insurance in fact fades...
...And at that, 1971 was a relatively risky year for insurance company investments...
...On the other hand, since actuarial tables prove that women live longer than men, women who insure their own lives pay slightly lower premiums...
...We simply don’t need as much life insurance as we grow older...
...The screwing of the average life insurance buyer, perhaps more than any other outrage the average man must endure, results from a syndrome that has come to be called the “tyranny of the experts...
...Her inquiries were fielded by a pleasant-sounding young lady who confided that life insurance is very complicated and suggested she contact an agent who could fully explain its intricacies...
...Offering the 10 highest-cost cash-value policies were: Georgia International Life Insurance Company (Denenberg says this company has since withdrawn its policy), The State Life Insurance Company (Indiana), Valley Forge Life Insurance Company, The Employers Life Insurance Company of America (Delaware), Old Republic Life Insurance Company (Illinois), Wabash Life Insurance Company, Pennsylvania Life Insurance Company, Puritan Life Insurance Company, Security Life and Accident Company (Colorado), Travelers Insurance Company...
...In 1971, 36 per cent were tied up in corporate bonds, 34 per cent in mortgages, and only nine per cent in common and preferred stocks...
...It seems almost irreverent to point out that the insurance industry is so concerned about you that to make sure you don’t buy that power boat or summer home it adjusts the commission schedule to encourage its agents to push the right kind of insurance...
...In all, the life insurance industry collected $23 billion in premium payments...
...cash-value is a peripheral issue...
...By holding out this promise of never-ending security for our families, the life insurance industry has grown, in one century, from a tiny clutch of companies with little capital into one of America’s most powerful business empires...
...In contrast, the federal Investment Company Act of 1940 permits mutual fund salesmen only a ninepercent sales charge the first year...
...The universality of life insurance was largely precipitated by two historical forces...
...In fact, it is such a good idea that some lending institutions require it...
...Including reprints, several hundred thousand of the life insurance guides are in circulation...
...The second influence was the Great Depression, which left profound psychological scars on the generation of Americans who grew up then...
...What sets this and other life insurance commercials apart from the normal Madison Avenue fare is that they seem to pander- to our best instincts...
...One is the appearance of the “adjusted” method of calculating insurance company profits in financial disclosures...
...Shopper’s Guide Information Under Herbert Denenberg, the Pennsylvania Insurance Department has published two guides devoted to life insurance-one on term and one on cash-value policies...
...of the Brooklyn Bridge in anyone’s almanac of notable consumer disasters...
...Richard McCurdy, president of the Mutual Life Insurance Company in the late 1 8 0 0 ~co~m plained that “we had a lot of money coming in that we did not know what to do with...
...Listening to a net-cost explanation is like reliving a scene from James Thurber’s The Figgerin of Aunt Wilma...
...They note that the “interest” your savings earn is low-about two-and-al-half per cent...
...his widow would be cared for by the children, or, if he died while the children were not yet self-supporting, his father would provide...
...Others, like Pay Now, Die Later by James Gollin, a Chartered Life underwriter who “saw the light,” lambasted everything about the industry...
...From the beginning, it has been the repository of sizeable sums...
...That is a suggestion that will surely provoke the ire of not only the msurance industry but the National Association of Manufacturers and other business groups...
...The stolid, rock-like financial stability of major life insurance companies, whatever its potential for abuse, helps explain why we are so mesmerized by life insurance...
...To make the guides readable, some limiting assumptions were made...
...And a 64-year-old widow will have to be supported for a shorter time than one age 25...
...A doctor is no longer a general practitioner, he is an obstetrician or an ophthalmologist...
...In the case of life insurance, where we now essentially have the freedom to be bamboozled, that contention will face rough going...
...But none of this is as stupidly self-defeating as it sounds...
...If nothing else, term insurance, because it is temporary, offers the advantage that you can turn it off when you no longer need it...
...That apparently is a question that has perplexed the industry, too...
...The industry’s reaction to this logic, expressed in a sort of sputtering outrage, has often boiled down to the patronizing homily that people won’t save unless they are forced to...
...It is what lawyers know as an “aleatory,” or gambling, contract...
...Likewise, the buyer can be excused his skepticism for wondering whether he might not be better off if his policy were written simply enough so that his agent could spend full time on the United Fund...
...The problem, to use the economist’s word, is that the market is not transparent...
...There is a young artist who lives with his wife in a dingy one-room apartment in Manhattan...
...But he can “afford” creature comforts and status symbols that put him in hock up to his neck...
...During the 18th century in Europe and the 19th century in America, for example, wager policies flourished...
...One was the dissolution of the extended family...
...considerably less than it seems to...
...His sole concession to the age of Edison is a twoslice, pop-up toaster, which he wryly refers to as the appliance...
...Does the wife work...
...Like the Consumer Reports series in 1967, many were fuel for the controversy over term insurance...
...by contrast, the market value of the’ new automobiles they purchased that year came to $33 billion...
...The SEC ruling has been challenged in court by a group of mutual fund managers, holding out the prospect of extensive litigation...
...But in calculating insurance needs, he tends to forget there is some life insurance in the group health coverage provided by his employer...
...But while even the inexperienced car buyer knows enough about cars to assess the difference between a Toyota and a Porsche, only a minuscule percentage of insurance shoppers can distinguish among the reams of policies offered by the nation’s 1,800-odd life insurance companies...
...It is also no coincidence that in many state legislatures, the representation of insurance agents ranks second only to that of lawyers...
...The guides also include disappointing news for anyone with the bright idea of balancing his term and cash-value coverage by bud ding term “riders” into his cash-value policy...
...By 1971, the total assets of life insurance companies exceeded $222 billion...
...With a wager policy, you could insure the life of another-without his knowledge...
...Best’s Review, an industry publication, surveyed the insurers last summer and got the same answer from companies at both ends of Denenberg’s chart: minimal impact on sales...
...Most policyholders were factory laborers...
...That has only rarely been true in the political arena, and as for shopping habits, The National Underwriter pointed out last spring: Most people buy what they buygroceries, automobiles, insurance, liquor, and whatnot-knowing full well they could get as good a product for less money by shopping more cannily...
...To use the six words that can make most life insurance agents turn blue: Buy term and invest the difference...
...Getting across the consumerist case against life insurance had to wait for Herbert Denenberg, which is to say it had to wait for a man with a combination of his unique qualifications (he has two law degrees and a Ph...
...After years of study, the Securities and Exchange Commission (SEC) recently gave the green light to “variable life insurance...
...How rapidly do policies build up cash values...
...It is almost as if the intricacies were put there for the purpose of confusing-possibly to hide true cost, possibly to justify the existence of a whole layer of experts who, for a cut of your premiums, may or may not disclose some of what lurks beneath the fine print...
...Another motive for buying insurance may be the fear that a husband will die and leave his family to cover the monthly payments on the car, furniture, and house...
...Compare that with high-grade corporate bonds which yield six per cent and better...
...Who Needs An Agent...
...The cash surrender value quoted may be based on a liberal projection of the dividends the insurance company will declare...
...Women Are Cheaper Than You Think In all the hubbub over term vs...
...This American compulsiveness about life insurance has come about only in the last few decades...
...And the net cost does not take into account what the buyer’s money would have earned elsewhere at the prevailing rate of interest...
...On a minor scale, of course, the relatively free-form workday of insurance men has had some political and social implications...
...At one time, requests for the guides were coming at the rate of 5,000 a day, according to Denenberg...
...An industry group, the Insurance Federation of Pennsylvania, responded to the guide by advising consumers instead to telephone, toll-free, its Consumer Information Service...
...The guides indicate that there is little correlation between companies providing good term buys and those with good cash-v,alue offers...
...Nevertheless, the guides do convey a rough feel for the market...
...We can renounce the Oldsmobile and walk to work, feel socially virtuous as we perspire through the summer without an air conditioner, and haughtily eschew such sleazy baubles as the electric knife sharpener...
...Life insurance did not invent this tyranny...
...Rather, they climaxed a mounting surge of criticism...
...Here, without accompanying cost or premium data, is an abbreviated suminary of the guides: Offering the 10 lowest-cost $1 0,000 cash-value policies were: Bankers Life Company (Iowa), Home Life Insurance Company (New York), National Life Insura n c e Company (Vermont), Connecticut Mutual Life Insurance Company, Phoenix Mutual Life Insurance Company, Northwestern Mutual Life Insurance Company, Central Life Assurance Company (Iowa), State Mutual Life Assurance Company of America (Massachusetts), Modern Woodmen of America, Lutheran Mutual Life Insurance Company...
...The five worst were offered by: American Republic Insurance Company (Iowa), Standard Mutual Life Insurance Company (Kansas), The Baltimore Life Insurance Company, Benefit Trust Life Insurance Company, The Unity Mutual Life Insurance Company of New York...
...Let the buyer beware...
...Too often it means a pitifully small amount for premiums after expenditures for a too-costly car, too-lavish a home, too-quickly replaced furniture, and too-fancy expenditures have left so little that the head of the family excuses himself from buying a decent amount of life insurance on the ground that he can’t afford it...
...How the variable policy will work in practice remains to be seen...
...Prodded foir cost information, the insurance mlan as likely as not will treat the average man to a neat bit of arithmetic razzle-dazzle known as “netcosting...
...Under attack by many insurance commissioners for gimmicky policies and fraudulent advertising, the mail order firms nonetheless have opened the door to an insurance sales system in which the agent would go the way of the whooping crane...
...While getting 55 per cent of your first-year premium on a cash-value life policy (and five per cent of the next nine years’ premiums), the agent receives something like 30 per cent of the first-year premium if he sells you term...
...Cash-value insurance amounts to a combination of a savings account and a term life policy...
...From the beginning, insurance companies have found more profit in gimcrackery than in what term advocates call “pure insurance”-a trend that has led directly to “cash value” policies...
...The National Underwriter, ,a trade journal, responded to a pioneering series of pro-term articles that appeared in Consumer Reports in 1967: What does “Can afford” really mean...
...None of them made much of a splash...
...Since no legislation that the industry opposes is likely to be enacted at the state level, Denenberg proposed at the Senate hearings a law limiting life insurance to about two simple, standardized policies...
...Curiously, Herbert S. Denenberg, the Insurance Commissioner of Pennsylvania whose salvos have made him the insurance industry’s Public Enemy Number One, in some ways exemplifies the security-mania of the Depressionera generation...
...D. in insurance), a suitable forum (the insurance commissionership of a major industrial state), and a flair for grabbing headlines...
...It is not simply that nine out of every ten American families own some form of life insurance...
...While not totally without merit, these extra services are not very comforting...
...The result, as one ex-Chartered Life underwriter puts it, is that “You Only Know What the Salesman Tells You...
...Another unusual policy was the “tontine...
...Be that as it may, it is obvious that the insurance industry did not amass a $1.5-trillion colossus by riding the roller coaster with Wall Street...
...A self-serving answer, to be sure, but one that is not entirely unbelievable if you harbor any lingering doubts about the consumerist ideology...
...No one has ever polled the average American to find out what he thinks of the life insurance deal he gets...
...But they feel comfortable with their regular sources, and they continue to patronize them unless they find that the cost differences are reaching unreasonable levels...
...For one thing, you cannot make an intelligent choice by comparing premiums...
...But in an interview a few weeks before the hearings, he “cor~servatively’~es timated that life insurance customers pay $5 billion a year more than is necessary...
...Thus, the decreasing term policy that was worth $100,000 when you bought it at age 25 might net your widow, say, $20,000 when you die at age 64...
...Since term insurance embodies all the basic ideas of life insurance, it might seem reasonable to assume that term constitutes the core of the average company’s product portfolio...
...Can mail-order also sell life insurance...
...One of eight children in a family with no savings or life insurance when his father died in the thirties, the :I 2-year-old Denenberg was deeply moved by his mother’s ensuing financial predicament...
...In recent years, two developments have occurred that amount to a tacit industry recognition of the high cost of the agent system...
...Far from being completely extinguished, the notion of tying life insurance to some sort of dressed-up roulette game is enjoying a sort of renaissance...
...They also show, according to Denenberg, that when you buy cash-value insurance, you may be better off sticking with somealthough not all-of the larger, better-known, more financially stable companies...
...It is also a good idea for a family with a hefty mortgage to own a decreasing term policy linked to the outstanding mortgage amount...
...THE SCREWING OFTHE AVERAGE MAN : The case for the extended family: Life Insurance today by Urban Lehner As cinematic art, the 30-second clip is hopelessly flawed by melodrama...
...As recently as the turn of the century, most of the life insurance in this country had a face value so low that it amounted to a euphemism for burial coverage...
...Put the difference into something that will fetch a decent rate of return for your old age, they reply...
...The tontine buyer gambled that other tontine buyers would forfeit their coverage by falling behind in their premiums, thus enlarging the pot of paid-in premiums to be divided among the survivors...
...Invested, those assets represented seven per cent of all moneys flowing into financial markets...
...Yet perhaps as good a question as how you construct a $1.5-trillion structure is what you do with it once it is built...
...And while Denenberg, like the Pope, will admit no fallibility in what he has done so far or what he is likely to do (“As far as I’m concerned, the sky’s the limit,” he says), perhaps even Denenberg has come to realize the constraints of his conceptual framework-or lack thereof...
...Which pay the most generous dividends...
...Ergo, we must need it...
...While life insurance exerts its strongest hold over people who sink neckdeep into the swamp of mortgages and credit buying, even those who reject other fruits of the American economy willingly embrace insurance...
...At least 40 per cent of the licensed life insurance agents are incompetent, he asserts...
...Denenberg, for one, sees the problem as one of stupidity rather than cupidity...
...would deny his flesh and blood a little innocent recreation should he no longer be there...
...Denenberg reveals the average man’s dependence on experts with no little irony in his first life insurance “Shopper’s Guide,” one of a series of booklets, in which his Pennsylvania Insurance Department, naming names and quoting rates, ranks the best life insurance buys...
...Rather, it has a certain logical neatness about it that helps us keep our minds on what we are about when we buy life insurance...
...Do we...
...Certainly the idea behind life insurance is simple enough...
...Companies like H & R Block have made millions by guessing correctly that the bureaucrat who glories in fine print at the office will hire someone else to wade through the fine print on his income tax return when he gets home...
...Does the agent who represents a high-cost insurance company advise his clients that they can get a better deal from another company...
...A 30-ish father is playing basketball with his son when suddenly the action stops...
...it is that it would be almost unthinkable not to be covered...
Vol. 5 • April 1973 • No. 2
