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Life insurance industry will not police itself


NEW YORK -- Life insurance scandals continue to ripple through American pocketbooks. The landscape feels like the Wild West. Too many outlaws, not enough sheriffs.

The latest headline-grabber originated at giant Metropolitan Life. MetLife agents based in Tampa, Fla., gulled customers out of some $11 million, by selling them so-called "retirement plans" that were cash-value life-insurance policies in disguise. Buyers thought that their monthly payments were pure investments; in fact, they were life-insurance premiums.

After Florida's insurance commissioner blew the whistle, MetLife started offering refunds. "Not one customer is going to lose a penny," says MetLife president, Ted Athanassiades.

MetLife's Tampa office carried its fake retirement plans into 37 states and won praise from MetLife management for its enormous sales success. Copycats sprang up.

A client of a MetLife office in Hauppauge, N.Y., for example, thought she'd bought a retirement annuity; it too, turned out to be insurance, even though as a single woman she didn't need coverage. MetLife refunded the $4,000 she'd spent.

Before closing this particular chapter, MetLife may offer refunds to nearly 65,000 clients. The company has paid fines in Georgia and Massachusetts and other forfeits may follow. But all that's unique about MetLife is that (1) the promotion was so widespread and (2) it got caught. For several years now, many companies and agents have been touting insurance as a "private pension" or a "retirement savings plan" -- superior, they claim, even to tax-favored Individual Retirement Accounts, Keoghs or 401(k)s.

"That's moral malpractice," retorts consulting actuary Bruce Temkin, of Louis Kravitz & Associates in Encino, Calif. "Persuading individuals to use insurance in lieu of other, more appropriate retirement investments could actually prevent them from accumulating the assets necessary to retire." The cost of the life insurance you don't need reduces the savings you might build.

Customers shouldn't blame themselves for falling for an agent's spiel. They may have received a misleading example of how the product might perform.

Take the handout for the Professionals' Alternative Plan prepared by Commercial Union Life Insurance of America, a company based in Boston. The handout compares the result of choosing CU's "alternative plan" (life insurance) over a tax-deferred savings plan and shows guess-which to be the better. But to reach that result, CU secretly credited its plan with higher rates of interest. Jim Mallon, CU Life's chief marketing officer, now says "the brochures are in need of serious editing."

CU Life's handout further asserts that cash-value insurance yields more retirement income even than tax-deductible plans like IRAs and Keoghs. But when challenged to prove it, CU sent illustrations that don't work, according to fee-only life-insurance adviser Peter Katt of West Bloomfield, Mich., an expert on insurance pricing.

Rejecting Katt's analysis, CU's Mallon says, "We don't think our illustration is invalid."

Metropolitan Life is also under investigation in Pennsylvania, where customers have complained about "churning." You may have been churned if an agent talked you into switching one cash-value policy for another or using the cash in your present policy to buy a second one. The transaction may not benefit you but it pays the agent a big commission.

MetLife declined comment on the Pennsylvania investigation until it's complete. But a spokesperson said that nine agents or executives have been fired or resigned.

Firing a handful of agents jibes with the industry's usual defense: that sales deceptions are practiced by just a few "bad apples." But MetLife management was warned by the Texas insurance commission back in 1990 to quit selling misleading retirement plans.

Will MetLife's troubles inspire a cleanup in the rest of the industry, shot through as it is with deceptive sales techniques? Not very likely, despite years of persistence by insurance-industry reformers. They're trying to teach a pig to sing, which wastes the breath and annoys the pig. It's time for better regulation to step in.

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