People buy life insurance for the death benefits it provides and only secondarily as a vehicle for savings. Therefore it is wrong to sell insurance based on the rate of return on the savings part of the policy.
Representatives of both the insurance industry and state insurance commissioners yesterday offered these views before a House subcommittee hearing on life insurance cost disclosure.
Last week the director of the Federal Trade Commission's bureau of consumer protection testified that the public was being short-changed because insurance companies do not disclose the annual rate of return on the savings portion of a policy. Without this knowledge, the FTC official maintained, customers cannot shop around for the best investment.
Albert H. Kramer of the FTC proposed that the states require insurance companies to adopt a consumer cost statement for whole life policies. The statement would show the amount of yearly premiums, the consumer cost index (the difference between what a customer pays and be or the beneficiary gets back), and the average annual rate of return. The example given by the FTC showed that there was no return after five years and at the end of 20 years the return on the savings portion climbed to 2.97 percent annually.
Julius Vogel, senior vice president and chief actuary of the Prudential Insurance Company of America yesterday accused the FTC of using a "misleading and Confusing concept" in evaluating life insurance that tends to "misrepresent the nature and mask the favorable features" of whole life. He accused the agency of being biased toward term insurance.
(Whole life insurance covers a person indefinitely for the same annual premium and builds up a cash value. Term, which is less expensive, covers a person for a specified time and generally has no cash value).
Vogel said Kramer erred in treating a whole life-policy as protection as well as a savings account. Unlike a savings account, he said, the savings part of a policy can be used to purchase more insurance, provide a life income to an insured or a beneficiary, or serve as collateral for a loan. Moreover, interest payments are tax free.
Richard Minck, vice president and chief actuary of the American Council of Life Insurance, called the rate of return method of evaluation actuarilly too difficult and said the National Association of Insurance Commissioners had rejected it in favor of interest adjusted disclosure.
This type of disclosure tells the customer the total annual premiums over a specified period and the surrender cost, or how much he would get back at any given time if the policy were dropped or death occurred. Stated anothe way, the FTC approach enables a customer to compare rates of return between whole life and term insurance or between whole life and some other type investment.
The NAIC approach enables a customer to compare costs of whole life or term as offered by various companies, but not whole with term or with another investment.
The NAIC approach, formulated in 1976, has been adopted in fewer than half the states to date. The FTC charged that studies conducted for NAIC and by Prudential showed that few persons understood interest adjusted disclosure. Veteran insurance consumer advocate Joe A. Mintz, in a letter to the subcommittee, called the NAIC method "a week tool failing in the marketplace, and a laughing stock among life insurance agents."
NAIC chairman Herbert W. Anderson, Iowa state insurance commissioner, admitted the difficulty of putting a useful disclosure system into effect for so many people. The task was to make it better, he said.
According to ACLI statistics, 63 percent of all ordinary life insurance sold to individuals is whole life. Commissions and profits on whole life are mush greater than on term insurance.