THERE always seems to be something new you have to watch for in life insurance sales. Now it's the dates when dividend payments will change, on whole-life policies.
If you're shown the wrong date, you may get a policy that -- from the very first day you buy -- will not work the way you thought it would. That's because dividends are falling. Lower dividends change the way your policy behaves.
Say, for example, that you wanted your policy "paid up" in a fixed number of years. At that point, you'd get coverage for life, with no more premiums out of pocket.
But here's something you may not realize: Premiums always have to be paid for life. When you stop paying, the dividends simply pay the premiums for you.
To do this, the dividends have to grow by a certain amount. If they don't, you'll have to pay premiums for more years than you thought. What's more, the cash value and death benefit may be less than you thought.
(If you own a universal life policy, falling interest rates will have a similar effect.)
Now let's get back to the dividend date.
It's one thing to buy a whole-life policy that works, as intended, on the sale date but runs into trouble later, because dividends decline. The agent should warn you about this risk, and discuss in advance what you'll want to do.
But it's a disgrace to buy a policy that does not work from the very first day.
Take Martha Myers, 80, of Stilwell, Kan., a widow of modest means and now a victim of Alzheimer's disease. She had four tax-deferred annuities, worth $141,000, that she bought for retirement from the Lutheran Brotherhood insurance company, according to her attorney, Diane Nygaard, of Overland Park, Kan.
In 1991, an agent persuaded her to withdraw the money in seven annual (taxable) payments and use it to pay the premiums on four whole-life insurance policies, worth about $400,000. Her children were the beneficiaries.
Myers' premiums came to roughly $24,000 a year. After the seventh payment (when the annuities ran out of money) the insurance policies were to have been paid for life.
Well, they weren't. Dividends have been falling. When Myers bought, the agent used the higher dividend from the previous year to figure the paid-up period on three policies. The proper dividend scale would have shown either a lower death benefit or payments lasting longer than seven years.
In the proposal's fine print, Myers could have seen that the dividend scale was out of date. But who would know to look?
Myers' policies can stay in force for several years more, with the annual premiums taken from her dividends and cash values. But without additional payments, there's no guarantee they'll last for life.
A Lutheran Brotherhood vice president, Susan Oberman Smith, calls the erroneous dividend dates an "oversight." In compensation, Nygaard says, the Brotherhood has made two offers: a guaranteed paid-up policy for $68,000, or a larger policy, with payments resuming in six years. Myers will sue.
Another story: A disabled retiree of Allison Park, Pa., who doesn't want his name used, transferred nearly $18,000 from an old MetLife policy in March 1992 to buy a larger one. It was sold as a "retirement plan." He expected to pay premiums for three years.
But the agent used the higher 1991 dividend scale, which made the policy look better. Too late, this John Doe learned that he'd have to pay more premiums than he could afford.
MetLife gave him his money back, but he came out behind, after tax. And he no longer has his previous insurance policy. "I think people like us aren't really getting a fair shot," he says.
In the MetLife communications I have, the company tells the agents about dividend cuts several weeks before distributing software that reflects the change. So at first, they're illustrating policies with a dividend that is out of date.
MetLife agents are supposed to tell their clients. Some do; apparently, some don't.
Rick Sabo, a former MetLife agent and an insurance consultant with Money Concepts in Gibsonia, Pa., says that dividends have generally been going down, and are expected to drop more.
When you buy, get a policy illustration showing a lower dividend rate, to see how the policy might change in the future (some states require it).
Pub Date: 12/21/98