Predominantly poor and minority consumers who buy "industrial" life insurance -- usually low-premium policies sold door-to-door -- are generally victimized into spending much too much money for little or no benefit, according to a Federal Trade Commission staff report released today.
Also known as "debit" insurance, the type of policy covered by the FTC report generally involves "industrial" life insurance policies with under $1,000 in death benefits or "monthly debit ordinary (MDO)" policies with a $3,000 face value.
The FTC estimates that 102 million such policies are presently in effect, generating premiums estimated at $3 billion annually. Many of the sales of such policies were achieved through "misrepresentation and high-pressure sales tactics," the report said.
"Most debit insurance buyers are low-paid, unskilled and semi-skilled laborers, with household incomes typically under $10,000," the report stated. "The fact that ownership of debit insurance is concentrated among the poorest fourth of all families indicates that many of them own multiple policies."
The report, which does not express the view of the FTC, claims that because of a general lack of consumer information about such insurance policies, "the debit market appears to be dominated by relatively high-cost, low-return policies," and says that the "incidence of consumer loss from buying such expensive yet very limited coverage falls most heavily on poor people who can least afford it."
The staff report calls upon the FTC to take measures to improve the price and quality of debit life insurance and reduce inappropriate sales of the policies. Further, the staff reports asks the commission to increase the availability of information about such insurance to consumers.
The report details several consumer abuses that plague the industry, including "overloading," which the report describes as "selling too many policies to one buyer in relation to his need or ability to pay."
One elderly Tennessee woman was said to be spending $99.85 of her monthly $177.80 income on 30 life and health insurance policies.
"Some of these individuals skimped on food to pay their premiums," the report stated. "Yet the total insurance coverage each had with all their policies was well below the national average... It seems only too easy to find unfortunate cases in all parts of the country of low income families or elderly people spending disproportionate amounts of their limited income on multiple debit policies.
"Some parents are advised to buy life-insurance policies on their children to provide for their education," the report stated. "They discover only too late that the full face amount is paid only if the child dies."
Other problems cited included "churning," a practice involving an insurance agent convincing a policy-holder to roll over his policy. In other words, the consumer is told to cash in an old policy and buy a new one from the salesman, which gives the salesman a lucrative first-year commission, but often results in a net loss of coverage and policy value to the consumer.
In addition, the report states, many consumers are hit with scare tactics and harassment when they try to cancel policies. Frequently, too, the report states, consumers are encouraged to pay their premiums in advance so agents can make fewer visits, "but the policyholder does not receive any discount."
"Policy contracts are often written in a confusing and potentially misleading manner," the report states. For example, industrial life contracts usually include extra benefits only in the event of accidental death or dismemberment, but "some agents even trick consumers into interpreting the double or triple figures as the expected value of the policy."
The report cited a Pennsylvania Insurance Department study that noted "built-in features, such as triple indemnity for death while riding in a school bus or public transport, are not much more useful than coverage from being run over by a buffalo down-town."
"Industrial" insurance was so named in 19th century England because it was marketed primarily to industrial workers who were thought to need the discipline of premium collections coinciding with the issuance of weekly paychecks.
The other major type of debit insurance, MDO, was first introduced in 1926 and involved premiums collected monthly rather than weekly, with policies that have somewhat higher face values than industrial.
In both cases, the premium payments are usually collected door-to-door, whether weekly or monthly.
While industry representatives generally admit debit insurance is more costly than the alternatives, "it argues that the debit home service method helps keep policies in force and provides superior financial advice, and that poor people have no alternative," the report states.
But the conclusion of the report's author, FTC staffer Elizabeth D. La-Porte, is that "it is questionable whether debit insurance is indeed better than nothing. To the extent that many policyholders either lapse their policies and receive nothing, or pay in over the years more in premiums than they can ever receive in benefits, they might be better off without it.
"Moreover," she added, "most people are covered by Social Security, whose survivors benefits usually far exceed the life insurance benefits provided by several debit policies combined."
Insurance is regulated primarily at the state level, but LaPorte points our that most states "have generally regulated debit insurance less strictly than conventional insurance."