TALKING OF life insurance the other day, FTC Chairman Michael Petschuk told a Senate committee, "I think it fair to say that no other product in our economy that is purchased by so many people for so much money is bought with so little understanding of its actual or comparative value." That is a harsh indictment, especially when you think of the products on the market. But a report by the FTC's staff indicates there is some truth in it.
The report claims that the rate of return paid on what it calls the "savings" of holders of whole-life policies was between 1.2 and 1.85 percent in 1977.Those numbers are very small, even though the return is tax free, when they are compared with the rates paid on savings by banks, savings and loan associations, and other places where money is invested.
The catch, of course, is that the life-insurance companies do not propose to be investment houses or to deal in savings. They insure you against death and, they argue, the cash values and annuity payments many policies build up if you live long enough are only incidental to that insurance.
The FTC study tries to break the premiums that are paid on certain kinds of policies into what is actually required for life insurance and what goes in forming those cash values and annuities. It is on this latter category - what the staff calls "consumer savings." - that the rate of return works out to be less than 2 percent.
Regardless of what you call it, the amount of money involved is huge. At the beginning of 1978, the study says, the life-insurance companies held more than $140 billion in "consumer savings," about the same amount as that held by savings and loans in passbook accounts. Of every premium dollar, about 15 cents is paid out in death benefits, another 30 cents goes for overhead, and the other 55 cents goes into the savings component.
Mr. Pertschuk's complaint is not that this happens but that the insurance companies don't give prospective customers enough information to compare one company or one policy with another or to compare one kind of insurance with other kinds of investments. There are wide differences, he says, between companies and policies, but the average consumer doesn't have the mathematical tools to figure them out.
His conclusions and those of the FTC study are remarkably similar to those reached in years past by committees on both sides of Capitol Hill. It is time for Congress and the state governments, which have the prime responsibility for regulating insurance companies, to act on them and to make sure that consumers have as much information about the life insurance they buy as they do about bonds and other securities.