NEW YORK -- Beware the many deceptions in the sale of cash-value life insurance. These are the policies that combine death protection with various types of tax-deferred investment accounts. They make sense in some cases, especially for people in high tax brackets. But only if they're sold honestly. Three problems to watch for:
* Phony policy illustrations. When you buy a cash-value policy, the agent gives you several pages of numbers (the "illustration"), purporting to show how your investment might perform over 20 to 50 years. But its actual performance probably depends on what happens to interest rates or stock prices. Policies that were illustrated at higher rates than prevail today are missing their targets by a mile, forcing their owners to pay more or accept a smaller payment at death.
Hal Ferrell, 47, of Batesville, Miss., is accepting nothing. In 1987, he chose Crown Life Insurance Co., he said, because its illustration beat out the competitors'. But, Ferrell has charged in a lawsuit, the agent based his projections on a higher rate of interest than Crown was paying at the time. When he found out, Crown submitted a corrected illustration. In pre-trial depositions, Crown Life official said there was "a bug" in a policy-illustration system.
It's almost impossible to protect yourself from misleading illustrations, because you can't spot the traps that actuaries or .. agents may lay. One rule: Beware any projection that is markedly better than the competition's.
* Churning. You might hear from a churner if you've built up a lot of cash in your policy. You'll be urged to use the money to buy more insurance or to switch to a policy said to pay a higher yield. Too late, you discover that the agent is paid out of your cash values, which lowers your yield and depletes your investment funds.
Just ask Joyce and John Wills of Pittsburgh, who had been paying $50 a month for $155,000 worth of cash-value coverage from the Metropolitan Life Insurance Co. Their agent told them they could have an extra $32,639 policy free, Joyce says. So they signed up. Some time later, they learned that (1) their $50 a
month was paying the "free" policy's premiums; (2) the premiums for their older policies were being paid out of those policies' cash values; (3) over time, those older policies would have crashed.
After two years of complaints, the Willses made an appointment with a lawyer, at which point, Joyce says, the company undid the transaction. Pennsylvania's insurance commission is investigating alleged churning by MetLife. Nine agents and executives have been fired or resigned, MetLife says. The company declines any further comment until the inquiry is over.
If you have a cash-value policy, it almost always makes more sense to keep it than to switch. To discover any policy's true yield, consult actuary Jim Hunt of the National Insurance Consumer Organization, Box 15492, Alexandria, Va. 22309. For new policies, send him the illustration; for older ones, send a current projection of its future values. Cost: $40 to check one and $30 each for others sent with the same letter. Include a self-addressed business envelope.
* Pension destruction. The scheme deceptively called "pension maximization" is stripping thousands of widows of their future security. Here's how it works.
At or before retirement, a worker -- in this example, a husband -- is encouraged to buy a life-insurance policy. He then arranges for his pension to last for his lifetime only. That gives him a larger monthly income than if the pension were to cover the lifetimes of both himself and his wife. If he dies before she does, his insurance replaces the pension income she will lose.
In practice, however, this scheme rarely works, says a repentant Jerry Keating of McCook Lake, S.D., once a manager for John Hancock Mutual Life. He says that the agents were never taught the risks. One customer of his office bought into pension max, he says, with a policy projected to be paid up when the man retired. But that plan relied on interest rates staying high. When rates fell, the customer got socked with continuing payments that he couldn't afford and the policy lapsed. The couple sued and Hancock settled on terms that included a gag rule for both parties, a spokesperson says.
Almost every pension max illustration I've seen has been deceptive in some way. Unless you feel sure that your spouse will die first or won't need extra money, take the pension that covers you both.