NEW YORK -- Here's a financial tragedy that you'll read ever more about, as the population ages.
The story starts with young people, who buy cash-value life insurance for death protection and to build savings for their old age. When they get older, however, they're visited by a predator agent, who uses deceptive sales tactics to strip the cash out of the policy. You're left with no savings and eventually lose the policy, too.
This tactic is called churning. You're especially vulnerable if you have a small cash-value policy that you've paid on for years.
An agent will offer you another policy -- claiming that you can have it for little or no additional cost.
But that's not true. To pay the premiums on the new policy, you have to take loans against the cash value that your older policy contains. The agent doesn't tell you that. Nor does he tell you that every loan reduces your cash value and your death benefit. Eventually, the cash value runs out. To keep the policies in force, you have to start paying large sums out-of-pocket. If you can't afford it, your policies will lapse. The sad result: no savings, no insurance, no security for your spouse.
The agent may come from the company that you're currently doing business with. Or he may represent a different company. Either way, here are some of the signs that you're being churned:
* You turned in a small life insurance policy for a larger one and you're not paying substantially more.
* Your agent said your new policy was free or carried no out-of-pocket cost. Or he claimed that the dividends on the old policy would pay the premiums on the new policy, for life.
* The agent said your old company or policy was no good, so you should switch to a different policy. Or he said that your company was trying to get rid of small, older policies like yours.
* You signed a form, containing a lot of blanks, that your agent said was just paperwork.
* You got a notice from the insurance company, telling you about the loans on your policy that you didn't know you had. Your agent says, "Don't worry, it's a mistake."
* You got a notice from the insurance company that a policy had lapsed. The agent says that's a mistake, too.
In a variation on these schemes, the agent may tell a husband that's he's entitled to a free policy for his wife.
Unbeknownst to the couple, part of the regular premium they pay for the husband's insurance is then diverted to cover insurance for the wife. Loans are subsequently taken to keep the husband's insurance alive, until his policy runs out of cash and lapses.
To protect yourself against these pitiless schemes, you need to know two things: (1) You cannot get extra insurance, at a later age, for little or no additional cost. (2) If the insurance company notifies you that you have a loan, or that more premiums are due, or that your policy has lapsed, it's almost always true. The agent who says "it's a mistake" is lying.
If an agent approaches you with a churner's sales pitch, and you're tempted to buy, insist on a letter that puts the claims in writing. Most misrepresentations are oral -- hence deniable by the salesperson.
The letter should cover policy loans, use of dividends, whether the coverage will last to age 100, and whether cash values will ever be used to pay premiums.
Don't sign any form that contains blanks or has boxes that are left unchecked.
If you think you might have been churned already, get out the last statement you got from the insurance company. See if there are loans you didn't know about. If you have a flexible-premium policy, the statement's last page will show you the date when the policy will lapse, based on current payments and costs. Your coverage is at risk if it won't last until you're 100.
The first stop for complaints is your agent and the agent's office manager.
If they stonewall you, write to the president of the company and to the state insurance department. Get a lawyer or another insurance agent to help make your case.
In most cases, it doesn't pay to replace an older cash value policy or use its cash values to increase your coverage. Leave the policy alone and let it build.
If you need more coverage, add a policy rather than switch from the one you have.
Metropolitan Life has a useful free brochure on churning risks.
To get it, call 1-800-METLIFE and ask for "Evaluating Life Insurance Policy Replacement."
Jane Bryant Quinn is a syndicated columnist. Write to her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y. 10022.