'Home-service' insurance practices are crying out for stricter regulation


NEW YORK -- Not many people speak up for the working poor. Unethical practices that are deplored when visited upon the middle class become almost invisible to policy-makers when low-income customers are the victims.

A case in point: the so-called "home-service" insurance industry. The main abuse in this business -- selling stacks of expensive, small policies to low-income people who don't understand them -- is hardly new. That's the way multiple health insurance policies used to be sold to the elderly. The outcry against the health insurance deceptions brought remedial federal legislation. But hardly a step has been taken to address similar harms against the poor.

The home-service business is conducted door-to-door. Agents visit their clients weekly or monthly, collecting small premiums for small insurance policies. Mostly, that's life insurance, with an estimated $251 billion of coverage in force. But they sell health, accident, auto and property insurance, too.

For the problem in a nutshell, you have only to look at a case investigated by the Arkansas Department of Insurance. The policyholder didn't want to talk, but here's what his file shows:

* He bought a $750 life insurance policy on his mother, paying $3.81 a week. In less than four years, he'd have paid more than the policy was worth.

* Over a 20-year period, he bought at least 25 policies, all small, on himself, his wife, his mother, his children and two nephews. Most of them lapsed for nonpayment, leaving no cash values behind.

* The receipts he was given were a haphazard affair. Most of them failed to note exactly which policies he was paying for. Some receipts were written on business cards. One was on scrap paper. When his mother died, his insurer paid on only one policy, although he was sure there were two. But the records were so sketchy that the Arkansas department couldn't reconstruct what he owned.

* His policies contain a "facility of payment" clause that no middle-class customer would tolerate. Among other things, it allows the policy's proceeds to be paid to anybody that the insurer decides is owed money for the insured's "burial or illness or maintenance."

"This stinks," says Ronald Sheffield, Arkansas' deputy insurance commissioner, who has worked for years to try to get states more interested in home-service abuse. "Anyone who walks in the door and says the insured owes them anything can get money."

In another Arkansas case, a woman had about 40 small policies, most of them on a 16-year-old child.

The insurers argue that they're providing a needed service for people whom mainstream companies ignore. Ted Richardson of the United Insurance Company of America concedes that his customers pay more per $1,000 of coverage than middle-class consumers do but adds that they benefit from the "personal service and a convenient payment plan."

That's the kind of argument that drives Mr. Sheffield up the wall."Why should their customers thank them for selling a $750 policy that costs a client $3,000 or more in premiums?" he asks.

West Virginia is currently running the first state survey of home-service companies. Results are incomplete, but so far it appears that about 55 percent of the policies lapse within the first two years, says Hanley Clark, the state insurance commissioner. That's a big loss in value for the poor.

Home-service companies have a place. Lower-income people care deeply about providing themselves with burial money (although a $750 policy won't do it). They'd also like to leave something extra behind for their families. The face value of policies paid weekly appears to run in the $700-to-$750 range, but those paid monthly have face values of around $5,000 to $8,000, Mr. Clark says. These buyers deserve the same consumer protections as anyone else.

Arkansas intends to help. A planned regulation would require home-service companies to provide consumers with some minimal disclosure and proper receipts. They'd have to establish decent auditing standards. And they wouldn't be allowed to write several small policies on the same person when a single, larger policy would cost less.

West Virginia is talking about a similar approach. The rest of the states aren't even close.

Home service is the industry's "dirty little secret," says Kevin Hennosy, who critiques insurance in his newsletter, the Communique. But the lobbies that protect the business are strong. As long as it stays a poverty product, few insurance regulators seem to care.

You can write to Jane Bryant Quinn at: Newsweek, 444 Madison Ave., 18th floor, New York, N.Y. 10022.

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