Sen. Howard Metzenbaum (D-Ohio) yesterday accused some insurance firms at making profits in excess of 25 percent off so-called "industrial" life insurance. Company officials claimed the profits were in the 10 to 15 percent bracket.
The discrepancy, the Senate subcommittee on antitrust was told, was the result of different accounting methods. According to the statutory accounting method, required by state regulators for most insurance companies, a firm deducts its initial costs immediately rather than spreading them out over a number of years.
Industrial insurance. which offers the average buyer $700 in death benefits, is sold in the home. (The term "industrial" is a throwback to England, where agents collected weekly sums from the working classes as left the factories. Today the industry prefers the term "home service.")
Premiums are also collected in the home on a weekly or semi-weekly basis. As a result, the average cost per $1,000 of industrial insurance is $33.27, whereas the premium for that amount of ordinary life is $18.74, and $5.96 for group, according to the Federal Trade Commission.
Stated another way, the death benefits from an ordinary life policy for a 45-year-old male, paying $300 a year in premiums, amounts to 11,000 to $12,000 after 20 years, according to the subcommittee. The same individual would receive between $4200 and $6400 from an industrial life policy. The cash value of the ordinary life policies -- if the holder decided to surrender the policy after 20 years -- varies between $4600 and $6600, whereas that of the industrial policies amounts to between $1600 and $2500.
A number of larger companies have ceased writing industrial insurance, in some cases because of limitations placed by state insurance regulators. Yet it is still big business. Premiums amount to $3 billion a year. In 1976 approximately $138 billion of this type of insurance was in force. Most of it is sold to persons with incomes under $10,000. Some of these spend 25 percent and more of their incomes for the coverage.
Ealier this week the subcommittee heard from former insurance agents who related now they learned to shortchange and overcharge clients by erasing or omitting payments in debit books, exagerating benefits, selling them too many policies, and persuading them to turn in their old policies for new ones to stimulate commissions.
Consumer witnesses testified that sales agents told them industrial insurance would help assure their childen's education. In reality, the exagents said, it is only good for burial expenses.
"There is only one word to describe cases like these," said subcommittee chairman Metzenbaum. "That word is exploitation -- exploitation of the most sordid, greedy, and cynical kind. It's exploitation by companies and individuals who know precisely what they are doing. And it is exploitation that cries out for remedy."
Similar practices were condemned in a Federal Trade Commission report issured in January. Yesterday, Frank P. Samford, chairman of the board of the Liberty Nationa Life Insurance Co., branded the report as "clearly biased, inaccurate, and unscholarly, (full of) hearsay, generalizations and unsupported conclusions."
He said an index of cost and benefit comparisons would only be confusing for consumers and added that "people should be free to make unwise decisions as well as wise ones." Metzenbaum retorted that this attitude showed a "callous disregard" for the consumer.
Proponents of industrial life insurance contend that it affords coverage to low income persons who could not otherwise afford insurance.
Critics, like FTC chairman Michael Pertschuk, call this reasoning spurious. He cited available low cost alternatives such as group insurance, savings bank life insurance and Social Security coverage. Admitting the agency's hands are tied by the McCarran-Ferguson Act -- which exempts the insurance industry from federal antitrust statutes -- Pertschuck suggested reforms such as those undertaken by New York state. These include limiting the amount of insurance sold on minors, limiting the amount of the consumer's premium dollar that a company can retain for expenses and profits, and requiring companies to give discounts to policyholders who pay be mail or in larger installments than weekly. CAPTION: Graph, Comparative Value of Industrial Life Insurance; Figures are based on a 45 year old man investing $300 annually for 20 years. Source: Senate Antitrust Subcommittee, By Robin Jareaux and Bill Perkins -- The Washington Post