An article on insurance disclosure laws in the Business and Finance section Wednesday stated that "increases in the cash value of a life insurance policy are not taxable annually whereas interest and dividend payments are." The reference was to interest on savings accounts and dividends on corporate stocks, not insurance.
The chairman of the Senate antitrust subcommittee is "very likely" to introduce legislation that would force the life insurance industry to disclose its costs to consumers, an aide to Sen. Howard M. Metzenboum said last week.
The legislation would set federal mininum standards, to be administered by the states, for disclosing the rates of return on the savings portion of whole life insurance policies to customers in advance of purchase.
The insurance industry opposes such a move, which it considers "federal intervention" in a business that is currently exempted from federal antitrust laws under the McCarran-Ferguson Act.
At hearings recently, Metzenbaum noted that staff studies had shown that life insurance policies are often less than half of what they would earn in comparable savings plans.
That means that one out of every five dollars in savings - insurance accounts being second only to thrift association accounts as vehicles for savings - may earn as little as 2 or 3 percent interest.
Moreover, Metzenbaum declared, only if a policy is held 20 years or longer do yields rise as high as that: for the first five or 10 years the rate of return is negative, so the policy-holder loses money on the cash value. And 20 percent of all policies are allowed to lapse in the first 13 months; fewer than half are in force after a decade.
The average customer does not know in advance of purchase how much to return - or loss - he or she will experience on one ordinary life insurance policy as compared to another sold by a competitor, to term insurance with no savings component, or to a savings account or some other investment, said Metzenbaum.
Following similar hearings six years ago, the insurance industry and the National Association of Insurance Commissioners developed model regulations on disclosure. These NAIC rules have since been adopted by 21 states. Yesterday, though, Metzenbaum called the model system "so deficient that it is virtually worthless."
Insurance professor Joseph M. Belth of Indiana University went farther and termed the NAIC regulation "pseudo" disclosure. He said one of its primary faults is its complexity: Instead of a single rate of return, the NAIC model format contains six indices which, critics contended, the purchaser has difficulty understaning.
Edwin B. Lancaster, executive vice president of Metropolitan Life Insurance Co., defended the NAIC model which uses interest-adjusted indices.These permit comparisons between whole and term policies which the rate-of-return index does not, he said. Moreover, although the rate of return seems much simpler, it does not take income taxes into account. Increases in the cash value of a life insurance policy are not taxable annually whereas interest and dividend payments are.
A staff member recalled that the subcommittee has been trying for 20 years without apparent success to get the states to regulate the insurance industry effectively. Referring to current eforts, Lee Richardson of the U.S. Office of Consumer Affairs, remarked, "one does not have to have a crystal ball to know that this industry will use bitter delaying action at every sign of new progress on cost disclosure."