Insurers' problems call for caution, but not panic, from prospective customers


After federal regulators seized Bank of New England Corp. in January, thousands of customers wondered if they should take their money elsewhere. If they did move, many risked losing only some interest on certificates of deposit.

When insurance companies start wobbling, however, it's a different story. Getting at your money isn't as simple as filling out a withdrawal slip. Depending on the policy, you could lose a full year's premiums, or you may not be able to get your money at all.

What should policyholders do, especially if they are skittish after last week's takeover of venerable Mutual Benefit Life Insurance Co. by the state of New Jersey to stop a rush of policy withdrawals?

In almost every case, insurance specialists say, policyholders should stay put. For people buying new policies, there are more ways to check and double-check the financial strength of a company today than in the past, so future worries can be reduced as much as possible.

One of the most important things to remember is that events such as the Mutual Benefit failure are great opportunities for some insurance salespeople to try and sell new policies.

"There are some agents out there who try to take advantage of bad news and get people to switch companies," says Joseph Belth, an Indiana University insurance professor and editor of the Insurance Forum, a newsletter on the industry.

This can cost the consumer twice, Mr. Belth says. First, there may be a hefty surrender charge for discontinuing the old policy; second, the consumer might have to pay a higher premium because the policy pays the agent a higher commission.

While some agents may not be forthcoming about the commission, customers have a right to know what it is, Mr. Belth adds. The agent may get 100 percent to 200 percent of the first year's premium, plus a smaller yearly commission for as long as the policy is in force.

"If you receive a suggestion from an agent that you move [to another company], you must find out his financial interest in the transaction," Mr. Belth says. "Agents will tell you they're very sincere about helping you, but if he's very sincere, he ought to be able to tell you what the sale means to him financially."

In most cases, including Mutual Benefit, Executive Life and others that have either declared bankruptcy or been taken over by regulators recently, cash payments from the insurance companies may be in question, but death benefits are not.

"In general, death benefits are safe," says Glenn Daily, an insurance consultant in New York.

"Executive Life policyholders will lose some money, but the death benefits will be paid," agrees James Hunt, a director of the national Insurance Consumer Organization. However, people who bought Executive Life policies for retirement income probably won't get as much income as they expected, he says.

But even that reduction may not be as great as feared, if one of the greatest insurance failures of all time is any precedent. "When Baldwin-United was all done, instead of getting 10 percent [as a rate of return], policyholders got 5 percent," Mr. Hunt says.

The first thing anybody considering a switch to another company must do is find out what that switch will cost. That depends on the policy. With an annuity, for example, the switch is relatively easy. While there are penalties for cashing out of these retirement-income policies early, Mr. Hunt notes, you can simply switch companies through a "1035 exchange." Get a 1035 exchange form from the new company, fill it out and let the companies arrange the transfer.

With other life insurance policies, such as whole life, the costs of a switch depend on when you bought it and the commission. If the policy is less than 2 years old, you might get nothing back, because the company has paid out your premiums in commissions, Mr. Hunt says. "If you switch policies at this point, you're going to have a huge loss."

On the other hand, if a policy has been in force for a long time, XTC say 15 to 20 years, "Your loss will be the front-end charge for the new policy," he says. In between those time spans, the cost of switching companies will vary, depending on the rate of return, the commission and the premiums.

Once you've decided that the costs of changing companies is bearable -- or if you're buying a policy for the first time -- the next job is to pick a safe, sound company. That's not as easy as it appears.

"There's no good answer," Mr. Daily says. "I'm not aware of any set of rules that's going to keep you safe. The last six months shows there's no guaranteed system you can use" to find a perfectly secure company.

You can, however, improve your chances of avoiding the next Executive Life, Baldwin-United or even Mutual Benefit by looking at the rat

ings. The best-known industry rating service is A. M. Best Co. (Ambest Road, Oldwick, N.J. 08858). Its top rating is A+, and while some people think Best has been a little too liberal with that grade, only about 20 percent of the companies have it, so it's a good first cut.

Remember, though, that Mutual Benefit has an A+ rating, and Executive Life had one a couple of years before it went into bankruptcy, so other ratings should also be used.

Moody's Investors Service (99 Church St., New York, N.Y. 10007) and Standard & Poor's Corp. (25 Broadway, New York, N.Y. 10004) also rate most of the largest insurance companies. A smaller number of companies are rated by Duff & Phelps Credit Rating Co. (55 E. Monroe St., Suite 3600, Chicago, Ill. 60603).

You can write these companies, as well as A. M. Best, and ask for a copy of their latest rating on a company, as well as their most recent written report. There may be a small charge for some of the reports.

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