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Hoders of Cash-Value Life Insurance Need to Beware of ‘Replacement Artists’

May 3, 1995

To replace or not to replace?

Many people with cash-value life insurance have been taken advantage of in recent years by unscrupulous agents sometimes dubbed ``replacement artists.″

These agents generate big commissions for themselves by persuading policyholders to drop one cash-value policy for another. Cash-value policies are those that provide both a death benefit and a savings feature.

The practice is one target of a multistate task force announced last week by Drew Karpinski, insurance commissioner in New Jersey. The task force, composed of insurance commissioners from several states, is being formed to investigate allegations of improper life-insurance marketing at Prudential Insurance Co. of America and possibly other insurers.

Replacing one cash-value policy with another does occasionally make sense. The problem of unsuitable replacements ``doesn’t mean there aren’t some bad policies that could be replaced by better ones,″ says Atlanta financial adviser Elliot S. Lipson.

Replacement may also be worthwhile if it appears an insurer’s financial health has deteriorated severely.

But commission charges can make swapping one policy for another terribly costly for the policyholder. And with insurance so poorly understood, policyholders can ``easily be talked out of a good policy and into a bad one,″ Mr. Lipson says.

Stung by allegations of improper replacement practices, some agent groups are working on improved procedures to suggest to their members. For instance, a replacement checklist is being drafted by the American Society of CLU and ChFC, a Bryn Mawr, Pa., association of agents and advisers holding the Chartered Life Underwriter and Chartered Financial Consultant designations.

Policyholders can take several steps on their own to figure out if an existing policy is a darling or a dog.

For starters, be wary of business-hungry agents predicting the imminent demise of your current insurance carrier _ a practice known in the business as ``carrier bashing.″

You can gauge an insurer’s financial health by checking its ratings. Many insurance specialists like to see a rating of single-A, single-A-plus, or the top single-A-double-plus from A. M. Best Co. of Oldwick, N.J. Some libraries stock Best’s directories. (Or call 800-424-2378 or 900-555-2378. The cost is $2.95 plus $4.95 for each rating.)

Some insurers are also rated by bond-rating firms, such as Standard & Poor’s Ratings Group. A compilation of ratings other than Best’s for 1,600 insurers is published in the March-April issue of the Insurance Forum newsletter. (Cost is $10. Write to P.O. Box 245, Ellettsville, Ind. 47429.)

Also note that while plenty of insurers have seen their ratings cut, failures have been relatively rare.

After you have checked up on your insurer, the next step is to evaluate your policy’s performance. This is tougher.

``This is an industry that is steeped in the tradition of nondisclosure,″ fumes Joseph M. Belth, insurance professor emeritus at Indiana University, Bloomington, and editor of the Insurance Forum newsletter. Indeed, he says, some policyholders are told little more each year than ``the amount of the check (that is due), how to make it out, and where to mail it.″

To gauge policy performance, first ask the agent or insurer for an ``in-force illustration″ that shows what will happen to the cash value and the death benefit in future years if policy interest rates and death-benefit charges remain at current levels.

``You want your agent to help interpret what it means,″ says Richard M. Weber, a vice president with the insurance unit of securities firm Merrill Lynch & Co. You might also get a second opinion from another agent whom you trust or from a fee-paid insurance adviser such as Mr. Lipson.

Another attractive option, particularly if the policy isn’t large enough to merit paying steep fees: a ``rate of return″ analysis available for $40 from the Consumer Federation of America in Washington (202-547-6426). Working from an in-force illustration, the consumer group makes some assumptions about reasonable expense charges and then estimates the return on the policy’s cash value.

Policyholders can also check how policies from their insurers stack up against others in historical performance data assembled by A.M. Best. Reports on ``universal″ and ``whole″ life policies are published periodically in Best’s Review magazine, found in some libraries. A.M. Best also sells more detailed ``policy reports″ on these and other products, at a minimum cost of $45 for three (908-439-2200).

Anyone considering replacing an existing cash-value policy with another should carefully tally the costs involved. If the old policy is less than 10 years old, there may be substantial surrender charges. (Those charges may be either clearly disclosed or reflected in the slow growth of the policy’s savings component.)

Meanwhile, if the new policy is sold by a commission-paid agent, the commissions may exert a drag on cash-value growth for 10 or more years to come. (Another option worth considering: low-load policies sold direct to consumers by a number of companies.)

Mr. Weber has the following suggestion for people who are urged to replace an old policy with a new one: Ask the agent proposing replacement to put his or her rationale in writing _ and also to obtain written comment for you from the insurer he or she is representing. Indicate you will seek the view of your current insurer.

Having these comments should help you make an informed decision.

But you might not get that far.

``Typically the agent who is making the recommendation for replacement goes away,″ Mr. Weber says, ``which is kind of telling in itself.″